For many people, forecasting is like a shot in the dark with little or no hope of hitting the target much less with any accuracy! So why do they keep forecasting this way? To quote Albert Einstein, “The definition of insanity is doing the same thing over and over again but expecting different results.” I believe all of us want to do the right thing, be more accurate and achieve our targets but the fear of change is greater than not getting the expected results.
One of the biggest challenges for CFO’s and their team is to admit that the current process is broken and not producing the type of results key internal and external stakeholders are demanding. No one wants to admit that what they have been doing no longer works. And most people fear change. How do you overcome these hurdles? Following these steps will help:
1. Conduct an assessment
When looking at your current forecasting process, include a backwards look at the accuracy of key forecast elements such as:
- Product Cost (including direct labor and materials)
- Other significant expenses (like promotions and/or advertising)
2. Identify the root cause of the variance to forecast
- Lack of confidence
- For some of the key elements of business, forecasting out 3-4 quarters is purely a best guess. Determine the time horizon that best fits, creating a healthy tension or stretch for the person responsible for the forecast. It is ok to have different time horizons for different parts of the business.
- Lack of data and analytics
- The lack of useful data and analytics to support and guide decisions on the forecast makes the effort more of a “gut feel” or subjective estimate versus a data-driven and supported forecast. A supported forecast is more objective and substantiated. Utilizing data positively improves your future performance predictions.
- Forecast cadence is out of sync with the business
- If the forecast cadence (i.e., monthly or quarterly) is too rigid, it may not consider key changes to the business when they occur. This may result in not only large forecast variances, but more importantly, missed opportunities. The business wants to take advantage of, or perhaps avoid key marketplace changes.
- People closest to the business are not providing input to the forecast
- In many companies, the people providing the forecast information are not always the ones closest to business across all functions.
3. Develop a roadmap
A roadmap is necessary to remove obstacles and improve the efficiency of business processes. Your roadmap should follow a proven approach to address the people, process, data and technology issues, focused on improving forecasting accuracy.