Financial forecasting serves as the roadmap to success for both startups and enterprises alike. By outlining clear objectives and setting the right benchmarks, any organization can create a unified, overarching vision for their business to follow.
When analyzing the current economic environment, startups especially have to pay close attention to the direction that their business is heading. Whether a startup is raising capital or facing uncertain economic conditions, financial forecasting ensures that all senior management has greater visibility and guidance on the overall progression of the organization.
By analyzing current and historical data, financial analysts can use a forecast model to create a holistic report for management. This type of financial report is often used to plan for the future and help guide strategic decision-making among the executive team.
One of the biggest challenges finance teams face when creating forecasts today is the accuracy of their data. Traditional finance teams have to pull data from different platforms in order to create their forecasts. However, juggling multiple data sets from several sources is a painstaking process that is both time-consuming and prone to human error.
So, how can CFOs, FP&A managers, analysts, and financial controllers ensure that their data is accurate and up-to-date? If your team is looking to improve its financial forecast accuracy, our experts are here to help. In this guide, we will be explaining how to improve forecast accuracy and provide best practices to follow so your finance team can fine-tune its growth strategies.
What is classified as accurate forecasting?
Unfortunately, finance professionals do not possess the power to predict the future (would be nice, though!) But by using historical data and laying the right tech infrastructure early on, finance teams can improve their predictability analysis and forecast accuracy for the future.
According to FP&A trends, “The forecast is accurate if the actuals tend to match the forecast within “small” variances.” Another definition they highlighted states, “The forecast is accurate when all the assumptions and decisions are sound, correctly captured, sized and timed to.”
As you can see, both these definitions demonstrate that slight variations between forecasts and actuals are completely normal. However, the closer the finance team can get to their forecasted estimates, the better their financial planning will be. By having the right processes in place, finance teams can conduct variance analysis to study these differences and ultimately reduce the inaccuracies within their forecasting efforts.
Accurate forecasting: 6 ways to improve your forecasting process
The whole purpose of improving financial forecast accuracy is to reduce the need for corrective actions later on. Ultimately, a finance team should strive to build the right data processes to improve forecasting accuracy, conduct variance analysis, adjust plans as needed, and provide greater visibility to senior management.
1. Keep your financial forecasts flexible
A company is constantly evolving. A financial forecast should reflect these changes. Basing decisions on outdated information can lead to flawed decisions. If you are relying on a single annual forecast, you are already relying on outdated information. Build flexibility within your processes by switching to a rolling forecast model which will allow management to align on up-to-date data to support their strategic decision-making.
2. Maintain data integrity
Almost every decision the management team makes is based on data. That’s why maintaining high data integrity should be a finance team’s number one priority. By auditing changes and establishing permissions, finance teams can improve their data integrity for forecasting.
3. Take into account external influencers
Finance teams tend to take a laser-focused approach when analyzing their company’s data. However, when creating your financial forecast, consider both the micro and macro environments that your company is operating in. Do not rely on historical data alone. Taking into account competition, market conditions, and the like will allow your finance team to adopt a more holistic approach to their financial forecasting and planning initiatives.
4. Consider all outcomes with scenario planning
To get a broader perspective of a company’s financial health and improve agility across the entire organization, make sure to include scenario planning as part of your strategy. Scenario planning is the process of making assumptions about the future and predicting how your business will be affected.
As we’ve seen in recent years, the future is incredibly uncertain. Scenario planning helps teams plan for the unexpected. By creating multiple forecasts based on different scenarios, senior management is better able to pivot their strategy to continue their forward trajectory.
5. Take a lateral approach to forecasting
Most finance teams take a top-down approach when conducting business forecasting. However, the modern finance team seeks input from all functions. For example, talking to the Head of Sales may provide greater insight into the predicted revenue projections or actual demand from prospects. This allows the finance team to gain a more holistic view of how the organization is operating and performing. In fact, many organizations will prioritize a corporate performance management strategy to better understand how each team works and supports one another.
6. Benchmark against competitors
When discussing competitors, it may be wise to analyze their performance to uncover any trends, strategy shifts, opportunities, or progress that they have experienced over the past year. By doing a competitor analysis, you can have a side-by-side comparison to see how your company’s performance stacks up against other players within your industry and adapt your strategy accordingly.
Taking a modern approach to improve financial forecasting accuracy
With the proper technical infrastructure and processes in place, any finance team can streamline their forecasting efforts and set their company up for success. In regards to startups who are looking to raise funding, improving financial forecast accuracy will also provide stronger investor reports and build trust among future investors.
By upgrading your tech stack and using a centralized platform for all your data, your financial analysts will be able to create reliable and accurate financial forecasts from a single source of truth.
Looking to improve your business forecasting method? Talk to one of our experts today to see how Abacum can help improve your team's operational efficiency.
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