Guest post from Tony Levy, IBM Business Analytics
In an increasingly volatile business climate, forecasting has never been more important, or more challenging. Many corporations have to confront the fact that existing forecasting processes are not fit for purpose, and unpleasant surprises are becoming more the norm than the exception.
To help organizations confront these forecasting challenges, we interviewed Steve Morlidge, former Controller of Unilever UK, and co-author of the renowned book, “Future Ready – Mastering Business Forecasting.”
Tony Levy (TL): As we head into the 2013 budget season, what advice can you give finance executives?
Steve Morlidge (SM): Volatility, uncertainty and risk are increasing. Relying on the traditional annual budget as the sole system for resource allocation is no longer practical. Instead, companies need to rely more on timely, reliable forecasts. With a clear view of where the business is headed, companies can make better decisions about the future.
TL: So companies need to rely less on annual budgets and more on timely, reliable forecasts. What is holding companies back from better forecasting?
SM: My sense is that the root cause of the issues that people experience is a failure to get their thinking straight. Firstly, forecasting is not an exercise in prediction. I believe forecasting is an attempt to make a good enough estimate of future outcomes to enable sound decisions to be made. The starting point in any attempt to forecast is therefore to determine the decision making process that a forecast supports; which in the case of financial forecasting is usually to help make resource allocation calls. With this clarity managers can then make informed choices about:
· Forecast horizons and timeliness
· Measures of quality
· Risk and uncertainty
· How to manage a routine forecast process
TL: What is it about forecast horizons and timeliness that finance teams struggle with, and how should they be thinking about this?
SM: In my experience most finance teams recognize that it doesn’t make much sense to cut off forecasts at the financial year-end but have trouble articulating why this should be and working out what they should do instead. The reason why we should move to rolling horizons is that we need forward visibility that matches our decision making lead times – so if we need six quarters notice to execute on a decision then we need to see six quarter ahead at all times. People also struggle with working out how often they should forecast. My guidance here is that if a variable (such as revenue) is volatile and material for decision-making purposes then reforecast it frequently. If a variable is very stable and irrelevant to the decisions you need to take a forecast less frequently.
Stay tuned for Part 2 of my interview with Steve next week.
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