The most common approach for a financial forecast is one that focuses on the figures, outcomes or expected results at a certain date. The standard Forecast KIT consists of historic and seasonal data variables; any ordinary and extraordinary impact areas; the budget, used as a trusty comparison to derive any reasonable variances; and accuracy and precision of a detail-orientated approach carved out from the labyrinth of the big picture. All of these factors are normally flavoured with mathematic plausibility.
If your KIT is very similar, you are already in a good place to perform a quite achievable forecast, however the above steps do not turn the financial planning and analyst function into a strategic business partner that the current corporate body needs. You will still need to transform your usual forecast from an efficient financial tool into an effective long-term business troubleshooting initiative.
In order to be aware of any issue which may represent a bottom line threat or opportunity, you must be actively involved in, or highly knowledgeable of, the approval process which drives the eventual business decisions that will ultimately impact on P&L and cash flow. These include direct and indirect expenses; sales return and special discounts; gentlemen’s agreements; purchase contracts; organisation re-sizing; dispute resolution agreements and marketing programs
The information you collect must allow you to address timing and impact. This will also enable you to inject corrective action during the ongoing events and not just at the mature or post-event stage of the deal cycle, as often happens.
In order to select which variables will be reflected into the economic figures, both in short and medium terms, you should provide for a periodic survey to be addressed by all of the function managers. Plan a short meeting with the key people to identify all the worries that they are actually facing managing their slice of the P&L cake, and assess their referring economic value in, or deficiency in, the outcomes that your forecast represents.
You should enhance individual awareness of the current forecast, the risks which may affect the P&L, the referring impact on the company results, the investors’ reaction, as well as any direct or indirect consequence for customers and/or vendors. This approach can effectively improve the level of management performance. The key is to talk directly with the stakeholders and motivate them to find out how to re-address any current action or plan in order to bring a positive impact, or limit a negative one. Evaluating the economic values in your forecast will make it more realistic, it is important to monitor the corrective action by following up with the people in charge using a project management approach.
Putting these steps in place will enable you to identify a lack of management, for example, any business threats or gaps in communication, while assisting colleagues to develop the proper solutions that mitigate any business risks. You will also be able to maximize any opportunities and reflect the resulting economic values of each specific action plan into your final big picture forecast. Providing an exhaustive commentary about the disclosed risks and opportunities and the corrective actions in place will enabling you to present a strategic financial forecast to top management.