This article will describe the importance of forecasting with the best corporate performance management software and how it differs from budgeting.
Why is forecasting a good practice for all organizations? Here are five reasons:
- A forecast is usually a much quicker process and involves fewer employees.
- A forecast is entered at the general ledger account level while detailed templates, such as personnel templates, are not used.
- A budget is a company’s intention for the coming year, while a forecast is the most up-to-date expectation of what will happen over the remaining months of the year.
- The budget is finalized prior to the start of the year while a forecast can be created monthly or quarterly once the year has started and actual data can be reviewed.
- Many organizations create multi-year forecasts while budgets are only for the coming year.
While the budget is created one to two months before the year starts, the bulk of it is created up to fourteen months prior to the start of the month. For example, the budget is finalized in November for a company based on a calendar fiscal year, which is a year prior until the next November happens. Meanwhile, a lot can change in the various aspects of an organization regarding economy, industry, products, competitors, employees, and leadership. A forecast can more accurately influence decision-making.
Companies can impact their bottom line by forecasting on a regular basis.
An organization will be much more agile by forecasting monthly, as it can affect the following decisions:
- Expense reduction and tightening up the authority to spend money.
- Employee raises, new hires, and terminations.
- Capital expenditures reductions or increases.
- Strategic planning and modifying initiatives.
A forecast should include the current year actual data for the closed months. It should also allow the departmental managers to modify the amounts for the remaining months. Additionally, copying the budget data to the forecast will allow managers to concentrate solely on changes in the forecast. You can show the prior year actual data as well.
Another example is a rolling forecast. This template exists for organizations that do not create a budget but they forecast monthly. In a five-year forecast template, it is recommended to plan the first two years quarterly and the last three years annually.
One other option for a monthly forecast is to enter an expected annual amount by each account. Create a calculation that subtracts the annual amount entered from the actual year-to-date data. Then allocate the remaining amount based on historical actual data.
Finally, we recommend using the Breakback template. This template allows a manager to enter a few amounts to create the forecast in October, November, and December:
- The desired net Income of $600,000. This is the main driver of the Breakback template, and the only input that is mandatory.
- Increase all administration expenses by 3%. All of the departments are available for a global increase or decrease across all accounts.
- Increase administration full-time salaries by 6%. All of the accounts are available for a global increase or decrease across all accounts.
The calculation of a variance is the difference between the actual expenses and the budget, the actual expenses and the prior-year expenses, or the actual expenses and the forecast. To calculate revenue data, subtract the budget from actual expenses. To calculate expenses, simply do the opposite. The reason for this is that a positive variance is typically good while a negative variance is typically bad.
The first step is to calculate and analyze variances. Then allow departmental managers to enter comments to document the reasons for the variances.
Variance reports can have comparison reports against the budget for both month-to-date and year-to-date data. Envision a middle section that allows for comments or a conditional format for a quick highlighting variances for review. Variance reports can also be an exception report that allows the manager to filter out variances over or under a specific percentage.
There are several ways of showing variances, but how management will create actionable items to prevent or correct the issues remains essential. Variance analyses help highlight trends, opportunities and challenges. Variances should be a precursor to a re-forecast. This can significantly affect hiring decisions, marketing spending, and strategy changes.
Best-practice Recommendations on Variance Reporting and Analysis Processes
- Provide variance reports to each department manager.
- The finance department should meet with each department manager to review the variances and discuss any concerns and successes.
- Build an input form that stores comments for all departmental material variances.
- Concentrate on the larger variances and discuss with the executive management of the company.
- Make changes to the strategy and initiatives of the organization if needed.
- Continually re-forecast and make decisions regarding the forecast.
- Create a forecast then the variance reports should be off of the forecast first and the budget second.
- Document the action items and review them at the start of the next meeting.
Companies utilize forecasting to resolve budget allocation or to plan for anticipated expenses for the upcoming year. Take the time to forecast. Use the tips mentioned above to help achieve those organizational goals without wasting any time. Learn more from Enabling World-Class Decisions, the executive’s guide to understanding and deploying modern corporate performance management tools.
If you need assistance in finding a corporate performance management solution or a forecasting tool, Solver has a team of experienced professional that can get your organization starting in building the right template for you.
Solver enables world-class decisions with BI360, a leading web-based CPM suite made up of budgeting, reporting, dashboards, and data warehousing, delivered through a web portal. Solver is reinventing CPM with its next generation solution. BI360 empowers business users with modern features including innovative use of Excel in the model design process. If you’re interested in learning more, our team is excited to hear about your organizational needs and goals.