MSIT - Tips for effective forecasts
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1) The document discusses developing effective financial forecasts and improving forecasting through integrated data, comprehensive models, rolling forecasts, and scenario planning. It provides tips and examples of how to implement each of these strategies. 2) Integrated data from systems like ERP, CRM, and HCM can provide a single source of truth and eliminate data confusion. Comprehensive models should include income statements, balance sheets, and cash flow statements. Rolling forecasts provide more frequent updates compared to annual budgets. Scenario planning prepares the organization for multiple potential futures. 3) Implementing these forecasting best practices can provide benefits like 12% more accuracy, 50% less budgeting time, improved profitability, and a 46%
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MSIT - Tips for effective forecasts
- 1. 1 Developing Effective Financial Forecasts ADDING VALUE TO YOUR BUSINESS.Moore Stephens IT Solutions 16 May 2018
- 2. 2 Choo Kwong Chee (KC) Background: 18 years of consulting experience helping clients transform their business using technology Current: Director, MS IT Solutions
- 3. 3 Agus Tirtoredjo Background: 20 years of consulting experience in ERP, IT Strategy, Enterprise Architecture, Professional Services Current: Director, MS IT Solutions
- 4. 4 About MS IT Solutions (MSIT) MSIT is an associate of Moore Stephens International Limited, a leading accounting and consulting association with member firms in principal cities throughout the world.
- 5. 5 ▪ Compare against plan ▪ Make course corrections ▪ Predictable performance ▪ All of the above Poll: Why do you forecast?
- 6. 6 Poll: How often do you forecast? ▪ Once a week ▪ Once a month ▪ Once a quarter ▪ Every 6 months to once a year
- 7. 7 Companies with forecasts that came within 5% of actuals saw a 46% increase in share price over a 3-year period Source: KPMG 1 in 5 companies currently produce a forecast that is reliabled 22% of forecasts come in within 5% of actuals
- 8. 8 A changing business landscape. A need for predictability demands better forecasts Top-Line Workforce Expense Cash Flow
- 10. 10 Integrated Data Comprehensive Models Rolling Forecasts Scenario Planning 4TipstoImproveForecasting 2 1 3 4
- 12. 12 A. ERP (NetSuite, Oracle, SAP, etc) B. CRM (SFDC, Microsoft, NetSuite) C. HCM (Workday, Oracle, Namely) D. MAS (Eloqua, Marketo, HubSpot, etc) E. Other (Proprietary database) Poll: What systems do you access for your forecasts?
- 13. 13 Just Not Enough Time Data prep, waiting for data and assisting with data reviews are other areas that slow organizations down. Accessing data is a top obstacle for accurate forecasts and predictive analytics in 35% of organizations.
- 14. 14 A Centralized System to Deliver a Single Source of Truth Eliminates confusion among competing data sets Stops the debate over whose numbers are correct Refocuses the leadership discussion towards insight and action Enables a consistent view of data across the organization in real-time
- 16. 16 1. Income Statement 2. Balance Sheet 3. Cash Flow Statement 4. All of the above Poll: How comprehensive is your forecast?
- 17. 17 Integrated Model Demand Gen Social Events Targets Reporting Capital Financial Statements Real Estate Hosting IT Manufacturing Quota Pipeline Comp Plan Partners Agreements Ramped Reps Productivity Coverage Contractors Employees Benefits Hiring Dashboards Investor / BOD Packs What-if Growth Competition Currency Investment Reduction KPIs
- 18. 18 Collaborative Forecasting : Brainstorm with Business Partners Continuous: Use the right tools Collaborative: Get buy-in from the top Comprehensive: Use Analytics to identify metrics that drive growth
- 20. 20 Actual FcstActual Fcst Fcst Fcst Fcst Fcst Fcst Fcst Fcst Fcst Actual Actual Fcst Fcst Fcst Fcst Fcst Fcst FcstActual Actual Actual Actual Actual Fcst Fcst FcstActual Actual Actual Actual Actual Actual Actual E n d o f Y e a r “The Wall” Actual Actual Actual Actual FcstActual Actual Actual Actual Actual Actual Actual
- 21. 21 Issues with Static Budgeting ▪ Requires detailed projections and plans upfront. – Prepare in Q3 (15 months ahead). ▪ Outdated once finalized. – 90% of companies don’t change resource allocation to reflect changes in strategy or environment. (Deloitte) ▪ Focus not on driving success of organization. – Use-it or lose-it mentality. Focus on securing resources. – Least-risky mentality. Focus on accuracy. – Sandbaggers and Optimists mentality. Focus on performance measurement.
- 22. 22 What is Rolling Forecast?
- 23. 23 Benefits of Rolling Forecast ▪ IBM study: – 12% more forecast accuracy – 50% less budget preparation time – 10% more profitable ▪ Maersk case study: – Replaced budgeting process with rolling forecast. – “Design criteria” • Visibility: Forward looking • Agility: Early identification and correction • Control: Balance scorecard driven • Simplicity: Removal of unnecessary details Source: London FP&A Board
- 24. 24 Defining the Forecasting Horizon 24 Horizon depends on industry. ▪ Align to business cycle. ▪ Look at least four to eight quarters past current quarter. Guiding questions to determine horizon: ▪ What is the speed of change in my industry or business? ▪ How intensive are the capital requirements? ▪ How long does it take to bring facilities online? Months or Years? ▪ What are the lead times for our products? ▪ How long does it take to change supply contracts? ▪ What is involved in adjusting marketing programs (or other drivers of demand)?
- 25. 25 •Part Driver based model •Forecast as measurement tool •Two processes: Traditional and Rolling •Average level of detail •Average collaboration •Some predictive Analytics •Partly automated processes •Inflexible FP&A system Rolling Forecast Maturity ▪ Enablers to adoption: – Automated processes – Driver-based model – Analytics – Collaboration – Flexible FP&A system “Attempting to do a rolling forecast for a multimillion or multibillion- dollar company in Excel is almost impossible.” Association of Financial Professionals 20% of companies abandon Rolling Forecast. Why? Source: London FP&A Board Basic •Static model •Two processes: Traditional and Rolling •High level of detail •Basic collaboration •Basic Analytics •Manual processes •Excel Intermediate Advanced •Driver based model •Forecast as management tool •Rolling forecast replaces Traditional Budget •Simple and Agile process •Good planning collaboration •Advanced Analytics •Automated processes •Flexible FP&A system …because they are stuck at Basic level. Why?
- 26. 26 Example in CPM tool
- 27. 27 5 Steps to On Board Your Business with Rolling Forecasting 1. Model on Drivers, not details. – Simplify for frequent forecasting. – Select high-materiality, high-volatility items. 2. Use rolling forecasts to sound out multiple “what-if” scenarios. – Best-case, worst-case, base-case 3. Delink from targets, measures or rewards. – Objective forecasts based on real business demands and business environments. 4. Choose the right forecasting horizon for your industry. – Align to business cycles, not fiscal year. – Look 4 to 8 quarters past current quarter. 5. Don’t attempt with Excel. – Use a Corporate Performance Management application. – Provide management with clear, real- time view of progress with Dashboards.
- 29. 29 Planning for Multiple Futures Source: Monitor Company Group
- 30. 30 Why Scenario-Based Planning? ▪ To prepare organization for effects of multiple potential futures, so as to enable agile and timely responses. ▪ To understand the impact of a key scenario (e.g. its impact on financials, targets, cash, funding, KPIs) ▪ Direct time toward more strategic activities, e.g. contingency planning ▪ Extent: – Fundamental changes in strategy caused by global paradigm shifts – Tactical contingency planning focused on possible near-term developments
- 31. 31 1. Political 2. Economic 3. Social 4. Technological 5. Environmental 6. Legal External Influences - PESTEL Source: The Wall Street Journal
- 32. 32 1. Supplier Power 2. Buyer Power 3. Competitive Rivalry 4. Threat of Substitution 5. Threat of New Entrant External Influences – Porter’s Five Forces Source: The Wall Street Journal
- 33. 33 Identifying Patterns (Sets of Outcomes)
- 34. 34 Deriving Scenarios Source: Kees van der Heijden Impact/Uncertainty Grid Scenario Matrix
- 35. 35 ▪ Manufacturing: Product cost increase, new factory opening ▪ Non-Profit: New program or service, increased funding ▪ SaaS: Bookings growth, collections, payables (to forecast cash) ▪ Services: New clients, new service lines ▪ Healthcare: Census (patient) level adjustments, capacity planning ▪ Holding Companies: Proposed acquisition Scenario-Based Planning Examples
- 36. 3636 • Outperformed peers by 10% on Revenue Growth • Outperformed peers by 8% on Operating Margins • Had more streamlined decision making Organizations using scenarios: When Done Right, Benefits are Real Financial Planning, Budgeting, and Forecasting: Removing the Hurdles, March 2013 Rolling Forecasts Enable Accuracy and Agile Business Planning, May 2013 Higher Revenue Growth Higher Operating Margins +8%+10%
- 37. 3737 • Lack of Process • Systems and Technology • Collaboration Challenges Typical FP&A attempts at Scenario Analysis do not result in actionable to-do’s because of: Despite the Benefits, Still a Minority Practice Scenario Planning 64% 14 % 20% Explore relevant scenarios Don’t explore more than 1 scenario 36% 2% Explore scenarios, but not all optionsDon’t Use Do Use
- 38. 38 ▪ Typical steps: Scenario Planning in CPM: 1) Corridor Planning ▪ Alternative outcomes of a “base case” scenario. ▪ What if key assumptions are slightly exceeded or missed?
- 39. 39 ▪ Look at scenarios on “and/or” basis. Scenario Planning in CPM: 2) Combined Scenarios
- 40. 40 ▪ Create alternative scenarios that are interlinked where the only difference is the timing of the event. Eg. Major acquisitions. Scenario Planning in CPM: 3) Delayed Scenarios
- 42. 42 Integrated Data Comprehensive Models Rolling Forecasts Scenario Planning 4TipstoImproveForecasting 2 1 3 4
- 43. 43 We Can Support Your Evolution Enhance Planning Optimize Finance Transform Performance Automatic rollups Fewer errors Faster cycle times Integrated actuals Driver-based models Full financial statements Collaborative processes KPIs & metrics Companywide planning Culture of analytics Strategic scenarios Business model evolution Increase Efficiency & Accuracy Improve Processes & Decisions Create Profound Strategic Value
- 44. 44 2 1 4 CONTACT US: Agus Tirtoredjo Kwong Chee (KC) agus@msit.com.sg kwongchee@msit.com.sg M: 91059374 M: 96924272
- 45. MS IT Solutions Pte. Ltd. is an associate of Moore Stephens International Limited, a leading accounting and consulting association with member firms in principal cities throughout the world. About Moore Stephens globally Since Moore Stephens London was founded a century ago, Moore Stephens International Limited has grown to be one of the largest international accounting and consulting groups worldwide. Today the network comprises 657 offices in 106 countries throughout the world, incorporating 27,613 people and with fees of more than US$2.660 billion. You can be confident that we have the resources and capabilities to meet your needs. © 2018 MS IT Solutions Pte. Ltd.