Strategy: Revisit your forecast frequency and methodology for better planning

In today’s world, the industry dynamics demand that corporate management execute new strategies rapidly. Organizations have started to realize the limitations of annual static plans and shortcomings of limited horizons. Long back, organizations were forecasting only once a year and now this trend is not to be seen anywhere at least in their wish list. The trend has moved to complete forecasting activity at least once a quarter but still if we ask them about their satisfaction on this frequency, we will hear that they would like to forecast every month for better planning and budgeting. Lot of factors like volatile demand, new markets opening up and old markets saturating, supply inconsistency etc. contribute to the need of forecasting multiple times in a quarter. A rolling forecast, which is a best practice, that is revised on a monthly or quarterly basis can ensure that financial planning is continuous and dynamic.

Introducing new methodologies , process and tools to forecast is the next step that most CFOs and CIOs have introduced some time back. To add to this, techniques like scenario analysis modeling help them provide better insights into future financial indicators and the risks and rewards of strategic actions.

The other methodologies that have come to the fore these days are lot more different from the methodology that focused more on the history of demand. Some of these include:
  • Zero based budgeting where the team starts forecasting with a clean slate with no history at all
  • Performance based budgeting which is also called as result oriented planning and budgeting
  • Driver based budgets which defines the drivers first and then the planning and forecasting is based on performance of these drivers
Interesting fact here is that while using any of the above techniques, the organizations still are not able to get rid of the historical data syndrome and have started blending the alternative forecasting methods with this obsession of theirs and coming out with a new way.

Now, let us look at the role of technology here. Certainly, technology will help the organizations to increase their ability to forecast as and when market conditions change, it will help the forecasting team to conduct simulation or “what if” scenarios and it will add to the existing capabilities to incorporate business drivers into the ongoing forecasting processes. In addition of the above, it is also recommended to adopt technology solutions for multi dimensional reporting, ability to drill down at multiple levels and ability to align sales forecasts with actual business revenue targets and costing forecasts.

Interestingly, today’s ERP software products are modeled around these needs and can help the organizations immensely in their endeavors to revisit their forecasting, frequency, methodology and techniques. Infact, ERP software providers often package financial planning, budgeting and forecasting applications as a subset of a more all-inclusive category of Enterprise performance management solutions which are extremely useful. While evaluating the ERP software products in this area, we must look at some critical features and then take an informed decision.

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