forecasting

FP&A Done Right: Achieve More Reliable Financial Forecasting

February 26, 2021 by Revelwood Leave a Comment

This is a guest blog post from our partner Workday Adaptive Planning, written by Gary Cokins. Cokins is an internationally recognized expert, speaker and author in enterprise and corporate performance management systems. In this piece Cokins outlines three steps for more reliable forecasting.

When a company fails to meet its financial targets, business leaders want to know why. Was it the pandemic? Did sales underperform? Did operations overspend? Were their purchases more expensive than expected? Was productivity below established standards? Did finance develop a forecast that was wrong from the start?

Determining the causes of budget variances is an effective way to avoid similar missteps in the future, as well as during times of disruption. But many businesses struggle to understand the causes of variances and to define a process that will turn out accurate forecasts every quarter.

Finance and business teams must work together to identify the activities or data gaps that led to a missed forecast projection and caused price, cost, and efficiency variances. Whether poor decisions were made, the business landscape changed, or customer needs evolved, digging into the root cause starts with building relationships based on trust and transparency.

Companies need to continuously answer these three questions: What? So what? and Then what? Answering the first question—What happened?—requires good reporting with visibility. Answering the second question—So what?—involves separating the signal from the noise and determining what is relevant from the reporting. Arguably, answering the third question—Then what?—is the most important and critical part, because only these decisions impact the future.

Here are three tips that will help your finance team set performance targets and standards that company leaders can be confident in.

Step #1: Bring everyone to the table

Hitting a financial forecast isn’t just about meeting sales goals. Employee turnover, travel expenses, marketing costs, and other operational expenditures must be accurately projected to create a viable financial forecast.

But finance teams can’t analyze all these variables on their own. They need to work closely with sales, HR, marketing, operations, and executive teams to get a clear view of past performance, changes on the horizon, and potential risks and opportunities.

Centralizing financial information in a single shared database reduces the time it takes for finance teams to gather this information, giving them more time to focus on analyzing causes of variances and speculating on potential outcomes. Collaborative financial planning software also helps keep information up-to-date by making reporting easier for other departments.

It may take time to get the whole company on board with a new data collection, integration, and delivery process, but the payoff that comes with more reliable reporting is worth the effort.

Step #2: Plan for multiple outcomes

It’s impossible to know for certain what the future might hold. No one has a crystal ball for this. But there are ways to view the planning horizon. One way is to create multiple projections that account for different scenarios. This can include sensitivity analysis by changing some of the variables, such as the forecast sales volume and mix, to calculate projected profits. This can keep your company running on all cylinders—regardless of what comes its way.

Project for at least two possible outcomes—one optimistic and another cautious—so you can create proactive response plans. Look closely at the assumed factors and variables that are most likely to impact your projections. For instance, a change in the price of raw materials, in labor rates, or the emergence of a new competitor could create pricing pressure, which might lead to a decline in revenues.

Scenario planning can also help companies navigate regulatory changes that come with political transition or turmoil. According to a survey by KPMG, 77% of U.S. CEOs say they are focusing more on scenario planning to manage change in the current political environment.

However, with the increasing responsibilities falling on FP&A teams, many feel they don’t have enough time for this type of proactive planning. Sixty percent of CFOs estimate that ad hoc analysis, such as running a new scenario for the forecast, takes up to five days, according to a survey we published a few years back.

Planning and budgeting software can help FP&A teams speed up the time it takes to outline the financial implications of different scenarios and outcomes. The right tool lets teams run reports with the click of a few buttons, giving them more time to consider the risks, opportunities, and assumptions to create comprehensive response plans.

Step #3: Collect customer data

Understanding changing customer preferences, needs, and demands can also help improve the accuracy of financial projections—and boost a company’s overall financial health. However, a third of U.S. CEOs say the depth of their customer insights is limited by a lack of quality customer data, according to KPMG. So it’s no surprise that nearly two-thirds expect to invest in data analytics technology in the next three years.

“The whole idea of knowing what the customer wants before they want it is sort of the brass ring,” Tom Hayes, president and CEO of Tyson Foods, told KPMG. “We have real-time data from the shelf back to our supply chain. It takes out a lot of waste and helps us to more accurately forecast—a great benefit for products with a short shelf life.”

Taking the right steps to figure out where a missed forecast and associated assumptions went wrong will help keep business performance on target year after year.

This blog post was originally published on the Workday Adaptive Planning blog.

IBM Planning Analytics Tips & Tricks: Planning Analytics Forecasting – Configuring the Time Dimension

February 16, 2021 by Revelwood Leave a Comment

The new IBM Planning Analytics Forecasting feature allows you to quickly populate future time periods based on past data values. This feature is especially useful to prepopulate a data set for you or your team to then adjust as you see fit. Because it is time-based, the feature requires that a time dimension has been set up in a specific way.

Ensure that the cube where you want to forecast includes a time dimension.
Make sure the dimension type is set to TIME.
a. Sign into PAW and open a new book. In the navigation pane, right-click on the Dimensions section, and click Edit settings.
b. Click on the Dimensions Attributes Mode button in the upper right-hand corner of the window.
c. Enter TIME as the DIMENSION_TYPE if blank.
Make sure you have a flat hierarchy available.
a. In the navigation pane, right-click on the dimension name, and click Create hierarchy.
b. Enter a new hierarchy name and click the CREATE button.
c. Use the dimension editor to add base-level time elements to the new hierarchy. The easiest way to accomplish this is by copying element names from an existing hierarchy in the dimension.
Your time dimension is now ready to use in a Planning Analytics Forecasting model.

IBM Planning Analytics, which TM1 is the engine for, is full of new features and functionality. Not sure where to start? Our team here at Revelwood can help. Contact us for more information at info@revelwood.com. And stay tuned for more Planning Analytics Tips & Tricks weekly in our Knowledge Center and in upcoming newsletters!

FP&A Done Right: Reforecasting in a COVID-19 World – Best Practices you Can Implement Now

August 7, 2020 by Revelwood Leave a Comment

This is a guest blog post from our partner Adaptive Insights, written by Bob Hansen. The article shares insights from Workday’s internal finance leaders on how they are adjusting to the impact of COVID-19.

COVID-19 has hit the entire world with unprecedented disruption, and you are no doubt feeling it in your plans and forecasts. Ironically, just as you likely completed your 2020 revenue, headcount, hiring, opex, and capex forecasts, COVID-19 rendered them moot.

In a recent webinar, we asked finance professionals where they’re focusing their attention in terms of scenario planning and reforecasting. More than a third of attendees (34%) are interested in planning for the top line to accommodate unexpected changes in sales or demand. Nearly one in three (31%) want to better understand and game out their cash position. Nearly a quarter (22%) are focused on how to plan for workforce factors like headcount, hiring, capacity, and utilization. For 13%, the priority is determining a way forward for opex, capex, and discretionary expenses.

Taken as a whole, these concerns paint a picture of businesses working hard to anticipate what the future holds when they realize many of their prior assumptions no longer apply.

So where to go from here? How can you chart a new course when time is of the essence and the waters are murky? The good news is that Workday Adaptive Planning can help.

The need for more granularity and flexibility

As we’ve been helping customers adapt and respond to the current climate, we’re seeing an increased need for two things across the board: more granular forecasts and a finer time horizon.

These two dominant asks point to the demand for business agility. As Kinnari Desai, senior director of FP&A at Workday, points out, “Flexibility and the ability to react quickly are the two most important things.”

For CFOs and their teams, navigating an uncertain future requires up-to-the-minute, data-driven forecasting that can be done monthly, weekly, or even daily. With the COVID-19 pandemic sending waves of disruption throughout every aspect of an operation, businesses need a real-time view into their cash flow to make the right decisions in the moment.

At Workday, our team of finance professionals has gathered timely and actionable tips for dealing with revenue shocks and workforce and capacity planning when income is hard to predict, and strategies for emerging from this pandemic in a position of strength.

Focus on 3 elements of driver-based top-line modeling

Along with the right attitude, a flexible planning environment, and a good dose of business agility, it’s vital to boil down your most important business drivers and optimize your plan to those key drivers.

When implementing driver-based top-line modeling, Desai says to focus on three key elements.

Align around the metrics that matter. Query your senior managers across the business on which metric or metrics are the most important in these times so you know what to optimize for when you run what-if scenarios.
Identify your largest business drivers. Focus on adjusting those levers to realize the largest financial impact (rather than trying to optimize for every single lever).
Home in on the top two to three meaningful scenarios. By now, you probably have a sense of the impact the pandemic has made on your business, so focus your energy and recommendations on the three most likely or meaningful scenarios. Don’t waste your time, cycles, and sanity spinning 10 or more scenarios that are only slightly different from one another. Iterate and refine the scenarios that will matter the most.

You can use Workday Adaptive Planning to tee up your top-line model without a lot of versioning headaches, number crunching or toggling between spreadsheets. Top-line modeling also helps ensure you and your leadership are marching toward the same goal—something that’s never been more crucial.

Understand the value of the common data model

As these changes impact your data model, as you encounter unforeseen expenses, and as you face the prospect of making critical decisions on an accelerated timeline, the true value of a common data model becomes clear. “At Workday, our common data model really helps us,” explains Desai. “At the end of the day, having the same data model being used in your planning system and your ERP system (and if it’s one and the same, that’s even better) is very important to react quickly and understand the data. I can’t emphasize enough the value of the common data model when you need to know what’s really happening in the business right now.”

Working from a single source of truth, notes Desai, you can better explore data, understand the source of that data, and identify viable, numbers-backed opportunities. Say you’re exploring the idea of moving all your new hires out by a quarter. Historically, that may have been done on a quick Excel workup or even a back-of-the-envelope calculation, with decisions based on a glance at the actual data. But neither of those comes close to what anyone would legitimately describe as “data-driven.” With Workday Adaptive Planning and a common data model, we’re seeing customers forecast quickly, adjust variables in real time, and identify the right moment for taking specific action.

From our own experience at Workday, we realized that to move quickly, we had to iterate multiple times. And we realized that revenue, headcount, and cash flow are all driver-based. A single source of truth is making those iterations easier because those drivers are always accurately represented.

Another key advantage: The platform also helps you isolate and measure the impact of specific variables, instead of the detail just disappearing in a never-ending stream of formulas and sheets. For example, many companies now face (hopefully) one-time expenses like supporting a remote workforce. (We created a special “COVID-19” project code so we could track these one-off expenses, like the relief package Workday provided its employees, separate from typical ongoing business expenses.) Operating on a common data model helps you trace the impact of that expense and present true business-related actuals-to-forecast variance.

Keep management in a forecasting feedback loop

Especially in a time like this, the most valuable role of FP&A is to provide expert insight and well-modeled scenarios to senior management early on so they can make informed decisions on issues like expense reduction, hiring, workforce deployment, customer payment options, and more. The faster they can understand and digest those scenarios and the data, the better suited your organization will be to see the other side of this with minimal lasting damage.

This new pace will most likely not let up anytime soon, so now more than ever, you need to utilize Workday Adaptive Planning to ensure your models, plans, and forecasts reflect the latest expectations and data. You have to be able to make changes on the fly and be ready with an answer when you’re asked, rather than spending the next two to three days calculating it.

So to help ensure your leadership is up to speed, turn to our platform to:

Build your Active Dashboard to showcase the top business drivers for quick reference and fast, high-level adjustments
Drill down into a specific number, or into specific areas of the company to better help understand relationships and correlations across departments or business units. Top-line numbers don’t always provide the insights you need, but discovering what’s behind the numbers can help you see, say, where that opex increase is really coming from
Automate as much as you reasonably can, including ingesting data instead of copying and pasting into reports, to free yourself of the manual minutiae and save time to serve as the strategic force you are

How quickly can you get Workday Adaptive Planning up and running?

This is a question we’re hearing frequently these days as FP&A professionals realize their spreadsheets and legacy planning systems have left them at a disadvantage—and they’re looking for something that will give them greater agility fast.

Depending on what you want with your initial build, getting up and running could take as little as a couple of weeks. As with anything, the timeline depends on a variety of considerations.

Workday Adaptive Planning is vendor-agnostic and easily integrated with most any other system. You’re going to want to pipe in any data source you’re currently using that’s valuable to your plan
There’s no real limit to the amount of data you can sync with Workday Adaptive Planning. Just determine what makes sense for your business—and if your need is urgent, decide what data is critical now and what can wait for later
Workday Adaptive Planning lets you plan as far into the future as you like. This is a significant differentiator from some tools like Salesforce, which allow you to forecast relatively near term or the quarterly pipeline but remains a transactional element. With Workday, you can look past the near term
If you’re still dependent on external files for your planning, no worries. OfficeConnect is a helpful add-on that lets you interact with live numbers in your Excel, PowerPoint, and Word documents

Change is always a constant. Yet unprecedented changes such as those we’re seeing today require more insight and support. That’s why we’ll be rolling out more webinars and education for you to learn how to get the most from Workday Adaptive Planning—and keep your business agile and responsive in these uncertain times.

This blog post was originally published by Adaptive Insights and appeared here.