It is hard to understate the importance of creating a reliable and flexible forecasting process. How frequently these forecasts should be updated, and how they should be shared, should be critical elements for consideration when putting this process together.
Be flexible and ready to reforecast
There isn’t a single answer or a set formula on how frequently you should update your forecast; it very much depends on the context of your business.
Questions such as ‘Where is my company in its lifecycle?’ and ‘What challenges are we currently facing?’ will help you determine the right period between forecast updates.
For a company that is close to insolvency, it is essential to forecast on a weekly, perhaps even a daily basis. It becomes crucial especially at the end of the month when there is an increase in financial activity – usually in the outgoings column with the likes of payroll and rent.
For most companies that are not in dire straits, the revision of a forecast on a quarterly basis is usually sufficient and it is common practice to have a rolling 12 or 18 month forecast that is updated quarterly.
Where the forecast straddles the financial year, this will become the budget, rather than doing an annual budgeting exercise that takes up significant management time and isn’t looked at from the day it’s published.
Sharing isn’t always caring
Sharing the forecast can easily get you into trouble if it’s not handled with the utmost care. It’s critical that practices around dissemination of financial forecasts don’t become sloppy.
A contentious issue is salaries. Entering a total salaries figure is fine when there are lots of people in a department, but if there’s only one, suddenly you are publicising a single person’s salary. Salaries nearly always take up a large part of the profit and loss, so only share individual salaries with people in the finance and HR departments, and of course the CEO.
Once the formal forecast has been presented to the board then sharing parts relevant departments can begin. While many departments or individuals will want to view the forecast, they should only review the parts appropriate to them. This should include their direct activities, as well as activities in other departments that either impact theirs or that they will impact. For example, there’s no point budgeting to save a head by moving to a paperless office if IT hasn’t put in a request for the relevant equipment.
Make the process efficient
To streamline the forecasting process, line managers should be given guidance and parameters on what the consolidated numbers need to look like. This is normally referred to as the ‘top down’ forecast; budget holders then complete their ‘bottom up’ budgets and the numbers are consolidated.
This almost always goes through one or two iterations but unless guidance is set, it can take excessive time, cause unnecessary stress and low morale amongst senior management. Tell departments what they can spend and be clear in what you want them to contribute, otherwise you’re going to get a wish list the company can’t afford and an unhappy team when you tell them they can’t have it.
Tags: Accounts, business, Finance, financial, forecasting, profit and loss