Your organization's annual budget is the backbone of your operations, a roadmap that allows you to set targets and measure your performance on revenues, cash flows, costs, and return on investment. The creation of your annual budget takes significant time as it must take into account your organizational strategy, market trends, product deployments, and acquisitions as well as the intuition and knowledge of your leaders. However, in spite of the best laid plans, the annual budget is often outdated soon after the fiscal year begins. This is where consistent forecasting steps in, allowing you to make informed decisions based on changes in the business environment to alter your initial projections.
COVID-19 is highlighting the fact that even monthly forecasting is sometimes not enough. With the business environment shifting on a daily basis due to this crisis, your monthly forecasting often suffers the same fate as your annual budget – outdated before you finish your morning coffee.
How the news cycle impacts your data analysis
As more information is released daily about the COVID-19 pandemic, businesses are applying updates to their plans and forecasts and making adjustments. As a leader, you are anxious for the most current information that will affect your projections and likely have many questions, depending on the nature of your business. Some of these are:
- What happens if the government changes the essential service list?
- How do we mitigate the risk of store and/or plant closures?
- If we are able, how can we retool and offer assistance?
- What if our stores can reopen at different times based on geography?
- How are our suppliers and customers adapting to the new environment?
There will be many obvious permanent effects stemming from this global crisis, but it is a certain subtle change that is critical to your budgets - the change in how you must look at data and what you need from analysis tools. In other words, your methods of analyzing data must evolve right along with the ever-changing news cycle.
'Flatten the curve' has already become part of our daily lexicon and has a major influence on market volatility and revenue projections. Static results are no longer enough. Looking at how the data is changing and considering what might be driving those changes is now more significant. Better analysis tools will give you better insights into the patterns behind the data and what they mean.
Adjusting your forecasting model
Your organization's forecasting model was developed using specific assumptions and constraints. However, the current business environment is testing the outer limits of those assumptions and constraints-in many cases far exceeding them. While some aspects of your current forecasting model, such as general expenses, will continue to be valid others, like revenue or production, will need to be adjusted to reflect drivers and formulas that are more relevant to the current volatile economic situation.
As you evolve your forecasting model, be sure to test these adjusted elements and compare the results to your existing model to evaluate which provides you the more accurate picture. In some cases you may want to continue to use both if they provide different insights.
Scenarios and solutions
In this current unstable environment, understanding the options and corresponding potential outcomes is a powerful tool to help you make informed decisions about your business. Building forecasts based on plausible scenarios enables you to both identify possible avenues to take and extreme outcomes to avoid. Ideally, having access to self-serve options to analyze scenario results offers the most efficiency in forecasting.
Corporate Performance Management (CPM) solutions are architected to empower you with the ability to build models of all possible business scenarios that your organization may need to consider. Users can adjust the modelling and drivers across these scenarios to perform sensitivity analysis allowing a better understanding of the impact of these changes on the organization's results. It is critical that you document the definitions of your scenarios by describing all of the relevant elements such as the key assumptions, different drivers, and business changes. When analyzing and comparing your scenarios, these definitions become very important.
The analysis of the forecasted scenarios forms the foundation of your decision-making process. In fact, creating a standard set of flexible reports and dashboards to compare the scenarios, incorporating insightful visualizations, is essentially the starting point for pivoting your business strategy.
Using what you have
We are seeing organizations do some combination of the following:
- Utilizing an existing CPM solution
Why? It makes full use of the organization's investment
- Increasing actuals tempo
Why? Importing actuals from your ERP(s) on a more frequent basis to the CPM solution reveals patterns as they develop.
- Increasing forecasting cadence
Why? Forecasting as frequently as possible helps to ensure that the organization is as agile as possible in the face of the rapidly evolving business environment.
- Adjusting comparative reporting
Why? With actuals available daily, the organization can see how they are trending against the forecast and thus adjust their comparative reporting.
If you don't have a CPM solution in place, spreadsheets are likely what you are using. While they're a great analysis tool, they lack the controls and structure of a CPM solution so you are likely experiencing some challenges. It will be beneficial to keep an inventory of what is working with your spreadsheet-based solution so that when the pace of changes slows, you can look to take all of those lessons learned and incorporate them into a CPM solution.
How BDO can help
Many Canadian businesses are facing the immediate challenge of prioritizing technology decisions affecting their workforce. Our team of professionals is ready to support you through the steps of adopting cloud technology to help mitigate the impact of COVID-19. Our financial planning and analysis technology leaders bring a wide range of planning solutions and can provide guidance to help improve your forecasting capabilities.
Kaz Takemura, Senior Manager – BDO Consulting, Practice Lead – Financial Planning and Analysis
Jack Trepanier, Manager – BDO Consulting, Architect – Financial Planning and Analysis