This document discusses effective financial forecasting and the need to transform forecasting processes. It notes that accurate forecasting is essential but difficult due to dynamic environments and challenges like inconsistent data, disconnected forecasts between departments, and manual processes. The document recommends that companies integrate forecasts across departments, leverage technology for planning, reduce forecast detail, implement rolling forecasts, and drive cultural changes to incentivize accurate forecasts. Taking these steps can help companies effectively execute strategies and allocate resources using improved forecasting.

1. Global
Finance
360
EFFECTIVE FINANCIAL
FORECASTING
DEVELOP THE CAPABILITIES NECESSARY
TO ANTICIPATE BUSINESS OUTCOMES
Author: Stephen G. Lynch
“Prediction is very difficult, especially if it's about the future."
--Nils Bohr, Nobel laureate in Physics
”Accurate
forecasting is
Predicting the future has never been easy. And in today’s dynamic and global
not an option for environment, it’s harder than ever. Yet despite the difficulties, an effective forecasting
process is essential to properly managing a company. Numerous stakeholders, both
companies today internally and externally, depend on the forecast to evaluate the health and direction of
the company.
– it is an
Despite the importance of an effective forecasting process, many companies continue
imperative. to struggle with a process that is highly manual and time-consuming, and that yields
information that is often inaccurate and quickly obsolete.
Companies must
There are various challenges that contribute to forecasting difficulty:
transform their
Management Expectations: Most management teams like detail and forecasting is no
forecasting exception. Most forecasts are far too detailed, creating a lack of focus on the key
drivers that “move the needle” on revenue and profitability. A large amount of detail in
process to
the forecast requires more information, and turns into a data collection exercise instead
effectively of focusing on the insights produced by the forecasting process.
execute strategy, Data Management: The monthly close cycle of many companies prohibits the timely
collection of data. Additionally, the level of granularity provided by the accounting
manage process is often inconsistent with the forecasting requirements of management.
Finally, quality operational data is required to understand the drivers of revenue and
organizational cost, yet this is exactly the type of data that is difficult to retrieve from a company’s
resources, and information systems.
communicate Disconnects Between Forecasts: Companies have multiple forecasts. Sales,
Operations, Marketing and Finance all have different forecasts with different models,
expected results assumptions and time horizons. When there is a disconnect between the various
groups, it is virtually guaranteed that the financial forecast will be inaccurate.
with internal and
Technology: Despite the millions of dollars invested in enterprise technology, many
external companies still rely on Excel spreadsheets to collect, consolidate and report forecasts.
stakeholders.” This leads to a highly manual effort that requires substantial time. The use of
spreadsheets makes multiple updates of the forecast difficult and error prone.
Organizational Culture: All too often managers are castigated for producing results
below forecast. As a result, managers are tempted to “game the system” by
forecasting on the low end of expectations with the hope of ending above expectations
at month-end. This can lead to deliberately inaccurate forecasts.
Global Finance 360 | Copyright 2010 | All Rights Reserved 1

2. About Global Finance 360
Building a Better Forecast
Global Finance 360 covers the
world of corporate finance and Given the challenges of forecasting and its importance to organizational management,
accounting and how these companies must find better ways to manage forecasting. Fortunately, leading
activities are impacted by companies are finding ways to make the insights from the forecasting process more
globalization. Focus areas meaningful. Listed below are five steps a company can take to transform the
include Finance Delivery forecasting process:
Strategy, Shared Services,
Business Process Outsourcing,
Process Improvement and • Integrate Forecasts: The financial forecast will never be accurate if it is
Organizational Design. developed independently of other forecasts. Line items in the financial
Global Finance 360 is run by
forecast should have direct ties to forecasts and planning assumptions made
Steve Lynch. Mr. Lynch is a
by Sales and Operations. All groups should be using a common set of drivers
Principal in the Finance and assumptions regarding the economic outlook and the expected demand
Transformation practice of a for the company’s products or services. A key benefit will be increased
global consulting company. He communication between departments.
is responsible for the marketing,
sales and delivery of Finance • Leverage Technology: Performance Management is one area that has
Transformation services in North lagged in the area of technology investments and integration. An effective
America and serves as a key forecasting process will have an application dedicated to the planning and
liaison for his company’s global performance management process to enable web-based data entry and
Finance practice. He brings automated roll-ups based on the reporting structure.
more than 15 years of
experience advising global • Reduce the Level of Detail: Most forecasts could benefit by dramatically
companies on their service reducing the level of detail. Every forecast should minimize the level of detail
delivery strategies and has
needed to forecast revenue and profitability. Attention should be paid to those
served over 60 clients in a
key line items that drive changes in the forecast.
variety of industries including
consumer product and industrial
manufacturing, aerospace & • Implement Rolling Forecasts: Business events do not follow the artificial
defense, transportation, distinction of a fiscal year end. An effective forecasting process uses a rolling
technology, entertainment and forecast to project beyond the current fiscal year. Six quarters is typical but it
financial services. He has also can vary by company and industry.
served as a Controller in private
industry and as an auditor in • Drive Cultural Change: Ultimately senior management will set the tone for the
public accounting. forecasting process. If managers know they are going to face a backlash for
telling the truth, they will continue to game the system and submit unrealistic
Mr. Lynch is an active content
contributor on the topics of
forecasts. An environment must be created where there is an incentive to
Finance Transformation and
create accurate forecasts and where managers have the political support to do
globalization and has presented so.
at various forums including the
IQPC Shared Services &
Outsourcing conference. He can
Conclusion
be found on the web at By following these best practices, companies will be able to reduce the time and effort
www.globalfinance360.com. required to develop a useable forecast. With improved forecasting, companies will
have an effective tool for executing strategy, allocating resources and communicating
Contact Information: expected results with key stakeholders.
Steve Lynch
Toll-free: +1.800.216.2512
Office: +1.719.481.2599
1042 W. Baptist Road
Suite 194
Colorado Springs, CO 80921
slynch@globalfinance360.com
www.globalfinance360.com
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