As a result of the ongoing economic uncertainties that businesses face, financial forecasting has become a priority for business planning. To thrive in a highly competitive global market, businesses require exceptional forecasting processes and a finance team that can organise them efficiently.
Financial forecasts are based on past performance data factoring in the current conditions or trends to prevent and mitigate risks that may arise. A forecast helps companies adjust to uncertainty based on anticipated demand for certain products or services. In this sense, having a good financial forecast is a competitive advantage. It helps organisations to be better prepared and face economic disruptions. A forecast can help the organisation adapt to fluctuations in income and expenses, helping a course change when challenges and opportunities arise.
Businesses must use the appropriate technology to plan an agile and effective forecast. A recent study by the Business Application Research Center (BARC) revealed that, in just two years, the percentage of organisations relying on predictive planning technology had increased elevenfold to 44%. This demonstrates the increasing industry reception to the power of technology when it comes to accurate financial forecasting.
This article provides insights into how to leverage technology and develop a strategic roadmap to take an organisation’s financial management processes to the next level.
Developing an income and expense model
Before building a comprehensive forecast, an organisation must prioritise an accurate and effective business model. One way to achieve this is through revenue modelling. An efficient revenue model must take into account all variables and answer the following key questions:
- What are our expectations in terms of sales?
- Do we have enough capacity to meet our goals?
- Do we need to re-think our long-term strategy to become more efficient?
- What investments are needed to increase revenue and cost savings in the next quarter/year?
- What should be cut to maintain profitability?
Of course, revenue models depend on the industry and type of organisation. A law firm might consider variables such as utilisation as a professional services organisation, whereas a manufacturing company might consider capacity and focus on the demand side. Whatever the nature of the business, the right model will help to better manage revenue to drive the business forward while remaining agile during economic hardship.
As well as income, an accurate forecast must consider the impact of outgoings. Some key factors when modelling expenses are personnel expenses (i.e., full-time or part-time employees) and operating expenses (i.e., fixed and variable costs).
Increasing importance of AI technology
Financial forecasting is a practice that must be developed and perfected over time. Therefore, once a business creates an accurate business model, it must define the frequency and timing of the forecasts. Each organisation must find a forecast frequency that suits its needs. Some organisations may require generating forecasts much more frequently than others. This is where technological solutions such as artificial intelligence (AI) can help automate and streamline financial processes – freeing up finance teams for more high-impact work.
Worldwide, IDC predicts that the financial services industry will be second only to retail when it comes to spending on AI between 2021 and 2025. It will account for nearly 14% of the $204 billion that will be spent annually by the end of that period. This development ultimately means that the proliferation of AI in the finance function is likely to continue. When it comes to forecasting, implementing AI can aid businesses in terms of simplifying the workload for employees.
Making data accessible enterprise-wide
Once the right model and frequency for reporting are established, businesses must define how they will leverage those insights and incorporate them into the overall business strategy and vision. As companies grow and data sources multiply, finance teams need cloud solutions that facilitate collaboration between everyone in the organisation. To make informed business decisions, they must have access to real-time data that enables what-if scenario planning. It’s also integral that solutions provide a single source of information for all financial and operational data.
To achieve efficient financial forecasting, businesses should remain cognizant of selecting scalable technology. They should also provide a clear plan to ensure that insights are accessible across the business. With effective financial forecasting software, businesses can access answers at their fingertips. Additionally, this simplifies the daily workload for employees, not to mention helping teams take a more proactive approach to running the business.
Workday is a leading provider of enterprise cloud applications for finance and human resources, helping customers adapt and thrive in a changing world. Workday applications for financial management, human resources, planning, spend management, and analytics have been adopted by thousands of organisations around the world and across industries—from medium-sized businesses to more than 45 percent of the Fortune 500. For more information about Workday, visit workday.com.
