Back to the future
Firstly, I just wanted to say that forecasting and budgeting are actually really marvellous things to do and accomplish. For most of the year accountants are stuck in the trenches of history, always working on moments in a business that have passed. Capturing invoices for goods that have left the warehouse, reconciling bank transactions that have come and gone and focused on making sure that the reporting pack for last month, last quarter and last year have their t’s crossed and their i’s dotted.
For a brief moment every so often we’re allowed to explore the future (think super nerdy Doc Brown and Marty Mcfly with calculators in “Back to the Future”).
The future of financial reporting is as much about the technology of forecasting as it is about the process itself, but technology really just automates a manual process in any way and I think the big shift here is actually around the process itself.
The future of budgeting is directly related to the pace of change in the current era. It’s no surprise that things have changed a lot since the advent of the microprocessor, but the pace of change is what’s actually been so surprising. Businesses come and go and what seems hip and fresh today can be completely obsolete in 24 months. And the rate of change is increasing.
Did someone say budget season?
To say the 5-year plan is out the window would be an understatement. Most companies would be happy with a really solid 12-month forecast. Which brings me to my first point. Most companies have a pretty waxed budgeting process/system and looking 12 months ahead isn’t terribly difficult.
What will change is the level of detail that goes into a budget. We have an extraordinary amount of historical data now that it would make no sense not to build your budget at the most granular level. Tweaking variables at this level can also really show up some of the sensitivities and levers that are available in a business. It also helps you hold people accountable at a far more granular level as well, rather than just at the top line.
If you’re still using excel to do your budgets though, you’re going to battle. Go straight to jail, do not pass start, do not collect $200.
What’s a forecasting season?
That’s right. There is no forecasting season. That’s because forecasting should happen year-round. And forecasting on a monthly or quarterly basis is fairly easy actually. Bear in mind that your fixed overheads and other costs are unlikely to change in the short term which means producing updated forecasts really shouldn’t be that tough. The future of forecasting will revolve around variables in the business only and tweaking those.
The future of forecasting is all about continually looking at your numbers and trying to figure out where you’ll end up. Every business should have a 12-month rolling forecast.
This is where you need to forget your budget completely. The rate of change is so immense at the moment that the 12-month rolling forecast is going to supersede the budget in importance. Business decisions need to be made off the back of the forecast rather than the budget and this is where the biggest change is going to come in.
Those companies that are allocating resources to their forecasting function will have the information they need to get a jump on the competition.
In other words, budgets are important, yes, and they’ll keep getting more complex and more granular but the real shift in the future needs to be towards monthly re-forecasting and that’s where the time needs to be spent. Processing of historical transactions are also getting more and more automated with time.
This means there’s an opportunity to redirect some of the finance department capacity towards figuring out where the ship is headed and trying to avoid the ice bergs rather than where its been.