“Actual Results May Vary” – The Art of Forecasting

Most organizations budget. They may not budget well, but at least they try. The budget process is the funding of the next 12 months of the strategic plan. It sets financial targets for revenue and expenses and it (hopefully) lays out how each area of the company will support the company strategy.

But is it sufficient to prepare a fixed budget and then not do it again for a whole year? In most cases, probably not. “Actual results may vary.” Budgeting is a process that often requires adjustment as the fiscal year unfolds and reality takes shape.

This is where The Art of Forecasting comes in. Forecasting is the process of marrying actual results, for the months available, with the budget and then making adjustments to revenue and expenses for the remaining months to fine-tune the funding plan of the strategy. This can mean a more aggressive plan, a less aggressive plan, reacting to changing variables, or staying the course based on the reality and the type of business that an organization is in.

But getting managers to prepare a good budget can be difficult. Getting them to re-forecast and repeat the process on a regular basis takes special care. Department managers generally do not enjoy the forecasting process and therefore view it as a chore that does not add value. The reasons for this are:

  • Most organizations still try to do budgeting and forecasting using Microsoft Excel templates. These templates are rigid and are designed for the way financial people think – not the way operations people think. So the templates do not let these people budget their departments the way they think about their departments.
  • The process of marrying together the actual results with the remaining months of budgets is not an easy task.
  • It is cumbersome to make adjustments to the budget numbers.
  • Version control is difficult.
  • Reporting is inflexible and cumbersome so comparative versions are not easily accessible.

In order to facilitate a better forecasting process, organizations require features and usability that Excel simply does not provide. These are:

  • An easy way to marry actual account balance results from the general ledger with the original budget so that there is an established baseline for the forecast.
  • A Turbo-Tax-like interface that walks the manager through the process without them having to learn how to prepare a forecast.
  • The ability of the manager to choose whether to freeze the original budget totals (so that the actual results cause the budget numbers to automatically adjust, by month, and holding the original total amounts the same – spreading the remaining available balances over the remaining months of the forecast) or simply allowing the totals to recalculate and replace the monthly balances in the budget with the actual results.
    Powerful spreading algorithms.
  • Version control and workflow to allow the forecasting process, and the approval of the forecasted numbers, to happen quickly and easily.
  • Reporting that allows comparative reporting for forecast to budget, by account and totals, so that managers can easily see and adjust numbers appropriately.
    Documentation and justification notes on all numbers.

The budgeting process in organizations is “directional”. As pointed out above, “actual results may vary”. So course correction is critical as reality unfolds.

Done properly, the forecasting process can be an immensely powerful and useful process in organizations in all industries to keep it on course. It allows organizations to have a fresher view of their funding plans for the strategic plan across the remainder of the fiscal year. It keeps managers focused on how they plan to utilize their remaining resources based on what has already happened in the organization YTD. And, it keeps the planning process fresh and alive. But it cannot be done well in any organization unless the process is supported for the managers responsible for the forecasting process.

To learn more about how to effectively do this in an organization, click here to view the recording of our webinar, “The Art of Forecasting… A Pragmatic Case Study.”

You will hear Dan Brent of the Massachusetts School of Professional Psychology discuss his institution’s use of forecasting to improve financial performance.

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