With a new year beginning, our thoughts turn to the future. Specifically, we're peering into our crystal ball to get a glimpse of how financial forecasting is primed to become a more effective tool for financial planning and budgeting.
Making the Connections
First, we must address the Ghosts of FP&A Past: Budgeting as a standalone method for management is a dinosaur, lumbering off towards extinction. We live and work in an increasingly interconnected environment and the limitations of budgeting are becoming rapidly insurmountable. Simple data production and aggregation has to take a backseat to analysis and deriving actionable insight from the data.
Enterprises are interconnected in ways that make traditional budgeting difficult. The confines of an office have given way to employees working remotely, connected by on-line collaborative tools and cloud-hosted solutions, while communicating with customers and the market at large through social media. In the meantime, IT departments are increasingly divesting rapidly depreciating 'hard' assets in favour of pay-as-you-go services.
As a result, every day, more and more businesses are turning to cloud-based tools over traditional spreadsheets to manage their data, analytics, and reporting.
"Documents are no longer static artifacts to be printed and forgotten, but alive and evolving, with revision histories and contextual conversations that have as much value as the document itself," writes Howie Liu in InfoWorld, referring to the way that the adoption of Google Docs has changed business planning. "Using modern version control systems, programmers have long thought of their codebases in this way -- now it's coming to everyone else as well."
This requires more interconnected planning to limit the errors and redundancies from multiple users. As we move towards seeing an entire enterprise engaged across platforms like Facebook and LinkedIn, we may soon see the rise of "social forecasting": taking trending data and rolling it into existing financial plans.
Looking Forward, Not Backward
Looking backward at historical data to formulate a budget is no longer sufficient. To keep up with modern market changes requires a high level of agility and the ability to pivot as needed.
"The reality for many business owners is a five-year and/or three-year projection that just collects dust," writes Jayne Gest in Smart Business Magazine. "They may have a one-year budget of financial data, but that may or may not be adjusted throughout the year."
This is emblematic of the sea-change occurring within the world of FP&A. We are seeing regular cycles move to continuous planning, integrating live updates to source data and continuous testing of forecast accuracy to make improvements. Automation has helped by incorporating more predictive analytics — which has led to highly sophisticated forecasting tools.
Based on the pace of change that we are seeing with the companies we speak and partner with, we predict that forecasting will soon surpass variance reporting, budgets and actuals as the main tool for FP&A. Businesses, buoyed by collaborative tools that allow for the management of enriched data for the first time, will be able to attain a "shared vision of the future" across all the platforms and lead to more nimble operations in an increasingly dynamic market.