A rolling forecast is not only about seeing the future unravel, but a constant evaluation of the management team to see if they are able to adjust their operations on time. Without it, any form of strategic planning becomes useless. Below you find a real-life case. Step-by-step each question will be briefly discussed. It is about a foreign business unit, which was part of a large European corporation, on the brink of a crisis.
1. What is expected for the year to come?
You want the rolling forecast to have the basics. This means there should be an overview of the budget: Budget (n), where “(n)” is the actual year, next to the actuals of previous years, Year (n-1) and (n-2).
In this overview, you see that the “year-to-date” numbers by management are optimistic. The plan was approved (sales target 43,0 million), meaning that the executive team knows how the management team will realise this growth scenario, in the last 2 quarters of the year.
2. Will they hit the target?
Next, you have the “year-to-date actuals” forecast. The local management team might want to see month-by-month numbers, to manage the sales force/sales division. As an executive team, you don’t want to start micro-managing a local business (you hired a country manager, remember). That’s why the budget consists of YTD numbers.
The first month was better than budget, pushing the YE (December) up to 43,4 million. Yet, the following months the business turned sour. What has been happening?
3. What is management expecting, short term?
You want to know if the management team is focussed and if the quality of the forecast is adequate, to achieve the quarterly results.
You see repeatedly the first month being overly optimistic forecasted by the management team: YTD 6,2 expected in February, YTD 5,3 realised; YTD 8,9 expected in March, YTD 7,1 realised; YTD 11,1 expected in April, YTD 10,1 realised. Is this just a bad quarter and what are their plans to recover lost sales? Or are they ‘wishing’ things will turn out for the best?
4. What is management expecting, long term?
A strategist looks just a little bit further. With a 13 months(!) rolling forecast you can get the next month projected twice! Near the monthly close, the management team has to forecast coming month revenues, based on their order book or some kind of sales projection. In addition, the same people should forecast the same coming month, but 1 year ahead. “Business-as-usual” or is there a something on the horizon?
YTD Februari, March and April of the actual year are the same as the YTD months of the forecasted year, 6,2, 8,9 and 11,1 million. The management team is thinking “business-as-usual”.
(Note: The YTD Actual of January (3,4), changed in the forecasted year to 2,5 million. This was an unwitting mistake, yet explained because actual YTD sales had dropped 0,9 million in February (from 6,2 to 5,3 million). This kind of planning should actually always occur, but some executives don’t want to see reality, that quickly.)
5. How will the business evolve?
Any trend should appear here, the forecasted 12 months (FC12). It shows the expectations the management team has about the evolution of the industry and/or the commercial impact of operational problems, eg. out-of-stock, recall, strikes. It presents the foundation for the next business plan, hence no surprises anymore.
Each month the business is loosing a million or more in sales and the local management team isn’t seeing any improvement, thus not acting. This confirms that the management team is ‘wishing’ for a better future. Is the business loosing market share? Or is there another crisis?
6. If action is required, can management do it?
The rolling forecast gives the executive team the opportunity to discuss with the management team what is happening and to decide on the best way forward. They can coach the management team through strategic choices and financial decision making.
In this case, there was another crisis and the executive team intervened. The country manager was effectively ousted and the thirty-something finance director and sales manager were put in charge. The executive team (approving their monthly purchase orders, of course) accepted the turnaround plan writing overnight by the finance director, and their re-forecast of May to YTD (Decembre) 21,2, down from 39,7 million.
7. Is the problem being solved?
The decisions of the executive team and the actions of the management team will appear in the rolling forecast. Again, short term predictions, YE (December) stability, and solid long term outlook (FC12).
The YTD monthly sales now are higher than forecasted, several months in a row. The YE improved too. Also the FC12 in August seemed more realistic (22,7, from 16,9 million), supported with 1 year ahead forecasts justifiably being lower. This gave the executive team the option to sell the business.
Lessons learned: Look outside the reporting deck!
The local finance director foresaw the downturn. He had been looking at the local accounting numbers, without all the reporting contingencies and reserves. In addition, he saw that inventory of their (worldwide) suppliers was growing fast, according to Bloomberg. This indicated a general slowdown in the segment. Fueled with ‘bad’ management, it was a crisis in the making. The turnaround plan focussed on expanding into another segment: fewer volume sales, yet solid profits.
Above were the key-questions related to Sales. You should also have a rolling forecast of the Operational Profit (OP). This allows the executive team to monitor what management is doing to improve operations (from COGS to overhead). Depending on the industry, add an Order book rolling forecast. To complete the monthly forecast executive deck, add a quarterly overview. In this way, you can have OP/Sales (%), which is relevant to all publicly held companies.
Even with the best forecast at hand, always look outside the reporting deck. Each step generates different questions. Talk to the management team. Remember, a rolling forecast means continually reviewing the (non-)actions of the management team and adjust operations in accordance with the business focus. A rolling forecast is one of the best first steps towards having an agile business culture.
There is evidence that FP&A interest is growing fast. Each and every day, CFOs feel the pressure building on the finance function to contribute more to business success. Within the CFO’s organization, the responsibility for tracking, assessing and reporting corporate performance normally falls to the Financial Planning and Analysis (FP&A) group.
In reality, FP&A specializes in analyzing and planning for the future, wearing multiple hats and identifying various improvement strategies. A valued FP&A specialist is someone who has the ability to engage with and influence the full breadth of top management – not just CFO – ensuring they have the necessary information. The specialist will explain why the business needs to go towards x, y, z markets and not the a, b, c direction they were planning.
Members of FP&A are the Finance “ambassadors” to business leaders. Embedded across the business, they are a crucial part of decision making in areas such as planning, making resourcing decisions, measuring success, approving investments, and more. Roles include working with the marketing, sales, product, and engineering departments, as well as corporate (which touches on everything, and interacts directly with the CFO). A strong FP&A individual will have the ear of the sales director and can talk to the commercial director and operations director. He/she can sit down with the managing director and also be the right-hand man for the CFO.
FP&A is historically seen as strictly a financial function. There is often confusion regarding the roles of Accounting and FP&A and their differing objectives. Accounting, on the other hand, is very much a science, focused on meeting GAAP standards, instituting controls and shortening the close process. As was previously quoted by Mark Gandy, G3CFO, "The financial controller typically looks backward, the FP&A professional looks forward and sideways, diagonally, upward, downward, multi-dimensionally, and so on".
The role of an FP&A professional is largely a new and evolving one—to be truly great s/he has to be flexible, quick and adaptive. As the primary driver for financial planning, forecasting, reporting, and business analysis, FP&A plays a critical role in the organization and with their business partners.
FP&A moves beyond the traditional budgeting process to link strategic and operational planning. It must focus on high-quality analytics and predictive planning to analyze multiple scenarios and make smart decisions more quickly than ever before. Information delivered quickly, flexibly, in a format most relevant to the issues at hand, is more important than ever. FP&A also has the ability to measure how well Accounting and Operations are collaborating and supporting the company’s long-term goals. An optimized FP&A group, with the direction of executive leadership, has close ties with Accounting and Operations and applies their expertise to facilitate a collaborative business environment.
The definition of FP&A
FP&A generally includes several discrete processes. While these systems can be managed separately, their ownership requires a common skill set. This includes an understanding of accounting, finance theory, data sources and definitions, modeling, creative problem solving and the economics of the business. The processes typically owned by FP&A include: – Budgeting – Forecasting – Strategic Planning – Management Reporting – Financial Analysis – Capital Planning – Business Modeling (e.g., new ventures and investments)
The Skill Sets of FP&A
Ability to communicate with and gather information from business partners - ability to coordinate FP&A tasks with the corporate calendar or the assigned deadline - Ability to prepare reports and/or make presentations - Ability to build budgets, forecasts, annual plans and so on - Ability to receive, analyze, integrate and consolidate assumptions and data from business units - The knowledge of finance principles and processes - Ability to synthesize information to create conclusions, alternatives and recommendations - Technical aptitude - Candidates should have the ability to solve problems utilizing technology- Knowledge of spreadsheet and database structures and functions - ability to perform variance analysis and reporting - Ability to define, incorporate and report on financial and/or non-financial key performance indicators - Intelligence, natural curiosity, and a desire to learn.
The decision cycle will help you and your association make knowledgeable decisions that drive exceptional results. I myself use this very process when making important forecasting and planning decisions. Today, I am going to share my insights with you and your team so that you can witness the profound impacts of implementing these five simple steps.
PROCESSES (Data Foundation)
The most significant element and the framework of all sound decision are processes. Processes are vital to any associations as they identify the core steps that need to be completed to reveal data.
Strong documentation, process mapping, and engaged process owners are the foundation of sound business decisions. For example, by incorporating process templates to department managers they will have a clear understanding of how to document their main processes, and it will much easier to collect the data necessary to complete the second stage of the decision cycle. Additionally, clearly establishing roles and responsibilities among your staff, as well as actively sharing information throughout the organization, are beneficial in building a high-performance team.
Do you currently utilize process templates? Do your staff members know their roles within the organization? Are your association’s strategic goals communicated and understood by all members of your team? Ask yourself these questions, and make sure that you are implementing the processes necessary to optimize the results you receive from executing the decision cycle
DATA (Data Mining)
The raw output of processes is data. Data are the tangible pieces of information derived from processes, and in reality, define the first step in the actual decision making.
When evaluating and analyzing data, you have to ensure the figures you’re looking at are accurate. You will build comfort and confidence in accuracy by having well thought out processes and consistency in execution.
Once collected, you can begin to turn your data into information, thus laying the strategic groundwork that you and your team need to make educated business decisions.
INFORMATION (Data Analysis)
As soon as data is collected, you can proceed to the Information stage. During this stage, data will be consolidated so as to begin the most important element in the decision cycle: analysis.
Analysis, analysis, and yes, more analysis is vital because this is where high value added activities are established (i.e. the particular point in time where variance, trending, segment, and drill down analyses are performed). Anyone can gather data, but turning that data into manageable information is paramount to successful decision making.
There an infinite amount of ways to analyze data. For example, by analyzing trends of membership or event data, you could explore answers to the following questions:
- Is one particular membership group yielding more revenue than another?
- Does the month of an event drive higher engagement than other months in the year?
During the Information stage, you should take a deeper dive into answering these types of questions.
KNOWLEDGE (Learning & Collaboration)
Once data has been collected and successfully transformed into information, you are now equipped to turn that information into knowledge. This knowledge can and should be, shared with colleagues, managers, and association executives.
This stage is specifically where organizations realize the true value of the cycle - empowering future decisions, which are based on concrete information derived from data executed by process owners.
Knowledge is power, and is central to associations as it creates an environment where people are empowered with the information and intent that they need to execute upon all aspects within the association.
DECISION (Business Execution)
The last step is making the decision.
If all of the subsequent steps have been successfully executed, anyone is capable of making and/or contributing to the final decision - not just the executive team. It is important to understand that as a result of the prior steps in the cycle, both comfort and confidence are built to help ensure that a sound final decision is made. Therefore, in reality, the execution is a comprehensive effort by all staff members because of the many touch points that the information has throughout the cycle.
Now that you know the steps of the decision cycle, let’s actually put it into action!
As a former public accounting auditor, I have been through my fair share of busy seasons which usually ran from September to April. My busy season experience consisted of 60 - 80 hour work weeks, working on the weekends, learning at an accelerated rate, and then waking up after April 15 trying to realize what the hell happened the past couple of months. For me, this was a character building and learning opportunity that I am privileged and thankful that I got to experience in my career. However, like most, I realized this was not what I wanted to do long term.
Moving on from public accounting to working for small to large companies I found myself in the similar burst of time known as "budget season". Although there are similarities there are also some key differences; those being working with a great team focused understanding, and partnership with other leaders. Also, spending 1 - 3 months working on next year’s financial plan and ultimately completing the budget. I felt accomplished and confident that we delivered significant value to internal and external stakeholders.
Then, you come into the beginning of the year and all the work you just completed is worthless. The business, assumptions, markets, strategy, economy or macro business factors have all changed. Now the budget is irrelevant and the company has to focused on either a new budget re-plan or forecast.
Below are my top 5 tips to help you get through your next budget season efficiently without burning out.
1. Help your team and organization focus on a few key business drivers.
Application: Some companies or teams want to focus on all business drivers and factors to ensure they have covered everything in the planning and overall budget presentation. Instead, focus on a few company KPI's to use for planning and predicting the business such as labor costs, capital costs or cash burn.
2. Balance time, energy and effort.
Application: Set up a tentative budget timeline and schedule with roles, responsibilities, and timelines for completion. This will help everyone involved in the budget process to know their responsibility and timelines to ensure you are moving together and executing.
3. Focus on quality and not quantity of budget documents.
Application: Do you have debt compliance reporting, corporate reporting, board reporting, or other reporting for external stakeholders? If so, let this be the first place you look to ensure you are completing the necessary budget documents for external and internal stakeholders. Also, don't get consumed with having an 80 excel tab document or other documents that focuses on irrelevant business factors.
4. Develop an attitude of learning & partnership and not frustration & isolation.
Application: As long as you are in a finance, accounting, or FP&A capacity; budgets will likely be a reality for you. As with anything in life, your attitude will determine your altitude and outlook on any situation. So, support the process, execute, and deliver your greatest effort and work.
5. Trust the process and don't try to rush the process.
Application: Budget season is a period where executive leadership to managers to individual contributors gain valuable insights about the business and company direction. Although you might have been through plenty of these season's in the past just understand this might be the first time for someone on your team or organization. So, help them understand the importance of trusting the process and not rushing just to get things done which could lead to others missing out on a great learning opportunity.
Lastly, no matter the situation or environment find the learning, growth, and opportunity to expand your skills, passions, talents and most of all have FUN!