Unless you have a working crystal ball, trying to figure what is going to happen in the future is, at best, a guess or estimate. The success of that estimate is dependent both on the amount and applicability of the data you use to project the outcome, and the methodology you use. If the data you use for your forecast is faulty, inaccurate, insufficient, or otherwise flawed, or if the way you use or manipulate that data is likewise inaccurate or inappropriate, the forecast you make is likely to be less than useful and, indeed, can be detrimental when you use it to make decisions that affect your practice or a client's business. Forecasting is particularly useful in financial planning, as well as other operational aspects of running a business.
In essence, forecasting is using various techniques to make a prediction of a future outcome and, if your prediction seems reasonable and realistic, using it to make business decisions. Forecasting starts with the collection of data with the intent of understanding the underlying components that drive future iterations of particular business processes. The second step is the application of these analyses to predict the outcome of taking one or more operational directions based on the expected outcome. Having a better understanding of the process is essential to make better forecasts and to making better use of the forecasts that are produced.
It's important to understand that a forecast, regardless of the method used to analyze it, is only as good as the data used in making it. And while some methods can produce results that are impressive, there is no way to be 100% certain or accurate regardless of how much data you have or what technique you use to analyze it.
Nothing illustrates the application of Robert Burns' warning about the "best laid plans of mice and men" than the pandemic we've all just been suffering through. With the havoc in all areas of conducting a business, many forecasts went completely off the rails. And the effects in many areas of business, including supply chains, are still being felt and will continue to be felt for some time.
This is not to say that forecasting is worthless, just that it is, at best, a useful business tool that produces results that need to be analyzed and understood in context. To help you fine-tune your approach to this important business process, we polled several consultants with extensive knowledge of this essential business capability, as well as a number of the software vendors in the forecasting and analysis space. Here's what they told us.
A pinch of this, a little of that
While there have been tremendous advances in data science, data mining and machine learning, making forecasts is still a matter of making the best possible guess with the data that is available. Exactly how you go about this is a matter of the kind of data that you are working with, the amount of relevant data that you have, and the outcome you are interested in forecasting.
Prediction is an end component of forecasting, and is the process of applying the results of a forecast or model to compute the outcome given specific constraints, such as the results of a forecast at specific time periods such as days, weeks or years (a time series forecast), or by changing one or more of the variables used in making the forecast, such as historical sales in units or dollars. Different types of forecasting approaches have different underlying models used in making the forecast. For example, time series forecasts might use statistical modeling technique such as ARIMA (or autoregressive integrated moving averages), or a computational model such as a neural network.
While you don't have to know how to do the computations, you do have to know when using a particular model will yield you the most appropriate and applicable results for the types of factors that you are trying to forecast. Modern software for forecasting and analysis is often a black-box model. The data goes in one side, gets manipulated using an applicable statistical technique or algorithm, and the results come out the other side. In most cases the software being used will offer the most appropriate model or models to make the forecast.
For example, according to Blake Oliver, founder and CEO of EarmarkCPE, "What I learned about forecasting is that most of us are doing it totally the wrong way. The easy way to do forecasting is to take your last few years of historical financial performance, look at the trend, and forecast using that trend. It's trend analysis. And, of course, that doesn't work when things are changing. It works in a static environment. But more and more, the modern world isn't static. Or, assuming that you can, you can compress it into a linear regression to give you something. But most businesses don't operate on a linear basis. And most of the time, especially small businesses, revenues aren't consistent from month to month, or quarter to quarter. A few big jobs can make all the difference for them. So the method of forecasting that is used by large corporations and by sophisticated CFOs is driver-based financial modeling. And, in essence, it's simply linking up the operational metrics of the business to the financial statements, and using data outside of what's on the financial statements to project the future. An example of that would be orders, or customers, or it could be the number of leads to your website. The purpose of the forecast is not to hit the number at the end of the year. The purpose of the forecast is to guide your team to doing operationally what they need to do to be successful."
Beyond the boilerplate
In some cases, your clients will be satisfied with the limited forecasts that are provided by the accounting software being used. But limiting forecasts to that approach might not be the best thing for either your client or your practice.
"It can be a daunting task for accounting professionals and/or finance teams to effectively and accurately budget, plan and forecast during uncertain times, while also remaining compliant with accounting regulations," Susan Gershman, chief customer innovation officer at Prophix Software, told us. "Financial planning and analysis software — specifically corporate performance management solutions — are modern, cloud-based tools that enable accountants to quickly and easily leverage their financial data for routine reporting, audits and filing taxes. Since all of the company's data (across departments) is automatically updated in the CPM solution on a regular basis, accountants can focus their attention on the data analysis and insights that are most important to their role. It's these results that have the greatest impact on the business, rather than the manual inputting and updating of spreadsheets typically required of accountants, which is also prone to error."
"Further," she added, "due to the flexibility of cloud-based CPM solutions, enabling 'what-if' scenario planning based on real-time insights in quick time frames, accounting teams have more flexibility and confidence to adjust financial budgets and forecasts as needed, before generating reports. With the ability to handle larger data sets, CPM platforms that are integrated with advanced artificial intelligence and machine learning technologies open up doors for accountants even further by delivering more significant insights related to the business. For example, AI-based CPM solutions can rapidly detect anomalies in the data that otherwise could be invisible. By leveraging these additional technologies, accountants and financial professionals have a more accurate, timely and complete picture of their decisions to positively drive business performance and mitigate risk."
John Murdock, CEO of Centage, agreed, adding, "Accounting firms and practices are very important partners to leaders running a business. The challenges of the last few years have been numerous: pandemic uncertainty, supply chain shortages, rising costs of goods, rising cost of labor, low unemployment, rising interest rates, shrinking capital markets, and looming recession concerns. All of these factors have led more businesses to need to forecast more often and be more precise in their projections, both top and bottom line. But challenges present opportunity as well, and the accounting firms that broaden their services to add FP&A practices will be the ones growing in the years ahead. FP&A practices can help their client improve their forecast accuracy and decision-making. One of the benefits of this accuracy is allowing their client's leadership team to be very specific about revenue-driving investments, both the amount of the investment and the (ever-important) timing."
Picking the right tools
Many practices and their clients still use Excel to do the majority of their forecasting. But while Excel is a powerful tool, it really takes second place in most instances to software specifically designed for the task of analyzing data to make forecasts.
Mike Triantos, head of partnerships at Jirav, pointed out some of the characteristics that forecasting software should offer: "Monthly deliverables are the cornerstone of offering FP&A advisory services. So in order to offer them effectively and efficiently, firms must utilize tools that can create the outputs needed in order to deliver these services on a monthly basis. This includes dashboards and KPIs, updated forecasts, variance analysis (budget vs. actual), scenario planning, workforce analysis, management reporting, and board/investor packages. Your FP&A tools and techniques should serve two main functions: They should have automation capabilities and other features to help your firm more efficiently manage client accounts and maximize margins without additional people resources, and they should produce the deliverables you need to offer complete FP&A services to your clients."
Having great forecasting software is a big step in the right direction. But unless you have staff that understand the process and can use the software effectively, the tool is worthless or, even more damaging, can produce erroneous output. Kae Arima, vice president of finance at Workday, said, "In both accounting and FP&A, there is a huge need for excellent communicators — people who can take this deluge of data and distill it into digestible, concrete takeaways for executive consumption. As we're recruiting for finance roles, we're looking for candidates who can synthesize data into simple messages and can craft a presentation that is easy to understand."
Jirav's Triantos detailed some of the skills he feels are necessary in order to make effective use of the available software tools: "In order to deploy these higher-level services, essential skills include: business acumen, an accounting and finance background, analytical skills to interpret the data, a desire to learn purpose-built software and grow beyond Excel, and the desire to learn the fundamentals of FP&A such as forecasting, budgeting and planning."
"A small amount (a couple of hours) of product training or education is needed to get started and the user can build skill as the complexity of their project requires," said Ronald Chang, senior product marketing manager at Microsoft. "For example, an accountant could use the software to visualize data that is in a flat spreadsheet with ease. For many people, this may be enough to solve the problems that they are intending to solve. But if there are complex requirements involving multiple data sources and very large end-user audiences, the need for education/training will increase. Additionally, some products also have AI-enabled capabilities like visuals (charts) that have supporting AI algorithms (e.g.: what-if analysis, key influencers, decomposition trees, etc.) which help accountants perform high-value analysis without the high cost of building AI models."
Don't go overboard
When it comes down to shopping for a software application or service to perform forecasting, analysis and planning, it's easy to be overwhelmed by features and functions. Like a hungry person at a buffet who loads up their plate with more food than they could ever eat, the urge to go overboard on functions and features is a common one. But again, the more tools we have at our disposal, the more confusing it becomes in terms of which tool to use, and the more confusing it becomes on how to use those tools.
To some extent, you have to rely on the vendors to point out which to use, and where the tools are appropriate.
"A large company might very well use much different types of modeling and forecasting methods than a business that does $200,000 or $300,000 in sales or services," K2 Enterprises' executive vice president Randy Johnston said. "I think that one of the things that I get from talking to people is that they don't tend to think of what they need to accomplish with these things. They are so dazzled by the shiny object that they don't think what they're going to get out of it. And the result is that if they come out with something that they haven't given a lot of forethought to, there's a good chance that they'll misuse what they do come up with."
Specialized tools, specialized knowledge
One final consideration when thinking about expanding your practice offerings in the area of forecasting and analysis is that you may not have the knowledge resources to jump in with both feet. As was said earlier, today's forecasting, planning and analysis applications go far beyond what was available 10 or 15 years ago, and while they may have gotten easier to use, being able to import data from multiple sources, they can still trip you up if you misuse them. So along with getting sharper and more capable tools, don't forget the need for updating staff's ability to use them.
Jirav's Triantos detailed some of the steps his company takes, which would be applicable to many firms seeking to implement advanced practice capabilities in this area: "The difference between successfully launching FP&A advisory services or failing is in the training and methodology. In our experience, failure often occurs in not realizing that there are two parts to master when launching an FP&A practice. The first part is how to produce, interpret and advise on FP&A services and deliverables. The second, which is often missed, is how to price, package, sell and market these new service offerings, since there isn't yet a 'standard playbook' or 'benchmark' for FP&A services."
Workday's Arima added, "With intuitive interfaces and easy-to-use controls, software can easily be learned by the tech-savvy finance professionals of today. What is more challenging is finding people who can communicate, analyze and connect the dots to tell a compelling story with the data. The most successful accountants I've worked with are looking at the data for more than just accuracy. While accuracy is important, with today's powerful technology, professionals are stepping up to the advisory level to help the business spot issues, solve problems, and see around corners."
Switching to more powerful and capable forecasting and analysis tools can have more benefits than just giving your clients better information on which to base business decisions. It can also boost your practice's advisory services bottom line.
Centage's Murdock pointed out, "Accountants in the past have generally focused on reporting historical performance and metrics to leadership, which tells where the business has been but not where it is going, and ensuring everything is accurate and right. As more and more automation is now available to assist with these processes, this is freeing up time for finance and accountants to focus on the future of the business — where things are trending, where the range of outcomes may be, and what are the underlying drivers and decisions that can influence top- and bottom-line goals in the future. This is the highest value-add the finance and accounting team can bring. These tools bring a wide range of capabilities to present forward-looking projections, as well as potential decisions that can be made that will impact the projections. This type of analysis is invaluable."
