Author: Workday Adaptive Planning
It’s not just meteorologists who can get forecasting wrong. If FP&A pros don’t take a thoughtful approach to establishing rolling forecasts, they can hit some unexpected stormy weather along the way. When that occurs, you run the risk of forecasts ending up, well, not being forecasts at all. They morph into updated versions of the annual budget as opposed to dynamic tools for creating visibility into the opportunities and challenges on the horizon.
Here are three pitfalls to avoid as you work to get the most strategic value out of forecasting and generate buy-in and momentum with your leadership team and business partners.
Let’s start with a driving analogy. Rolling forecasts should act like your headlights, providing steady and consistent visibility for what lies ahead. Too often, however, rolling forecasts become simply budget updates—which end up being the equivalent of driving so fast that the visibility provided by your headlights becomes increasingly limited.
The most common way organizations fall into this trap is by using the end of the year as a stopping point for forecasting. That may work in the first quarter, but by mid-year, your forecast faces a hard stop in six months. And, of course, by the end of the third quarter, you have a forecast that offers only three months of visibility.
When you’re forecasting with year-end being the stopping point, you’re just engaged in the process of determining if you are going to hit the year-end numbers that were established in the annual budget process.
The trouble with this approach is that it often encourages business partners to provide numbers and projections that are focused on “hitting the year-end numbers” as opposed to what is actually occurring in the business. With true rolling forecasts that don’t have an established endpoint, you encourage transparency, because the focus is on assessing what is truly happening in your business and the market so you can plan and react accordingly. Not only that, but you can also generate a consistent long-range view to aid in better decision-making.
Forecasts and targets are sometimes viewed as interchangeable. They’re not. In the simplest terms, a target is where you want to go, while the forecast continually tracks where you’re headed. In the ideal world, forecasts lead neatly toward your target. In the real world, a forecast represents the ever-changing dynamics of your business and the marketplace.
If you start viewing forecasts and targets interchangeably, you run the risk of facing mounting pressure to adjust the forecast to hit the target—regardless of other factors that might be cause for a course correction—or making decisions that help assure the target is still in your crosshairs.
If you separate forecast and target, you can then have much more robust conversations about what the business is doing to make the adjustments needed to where you want to go. That gives you a much richer, more robust planning conversation than you’d have otherwise. If you keep the definitions straight in your mind, you’ll avoid this pitfall, and really get to the heart of what you’re really planning to do and the risks you’re trying to run.
Making this distinction helps unleash the power of rolling forecasts. You can emphasize that the long-term focus is on the target, but that the nimbleness of a rolling forecast helps assure you will ultimately hit that target.
With forecasts, it’s often best to keep it simple. The biggest problem often is that FP&A teams include too much information, thinking that, by putting more and more detail into the forecast, they can really nail it down.
In reality, adding too much detail leads to two pervasive problems that ultimately can undermine your forecasting success. First, it requires much more work for your FP&A team and business partners. Second, handling more data and information increases the chances that your forecasts will miss the mark or be error-prone.
For example, the more drivers you include, the more things you must look at, the less time you have for analysis. So if you have hundreds of drivers, you’ve got to spend hours and hours—80% or more of your time—gathering up the data, leaving precious little time to do any real analysis.”
Some experts recommend the 80-20 rule: Aim to spend 80% of your forecasting time on analysis and generating insights, and 20% on collecting data. The only way to effectively do that is to simplify and only rely on the key drivers and data points that will provide clean and accessible forecasts.
The end result will be rolling forecasts that you can readily create and update—and that your business partners can easily understand.
This blog was originally published on the Workday Adaptive Planning Blog.