Date posted: 13/02/2019 12 min read

How successful CFOs win with business forecasts and budgets

Business forecasting, planning and budget setting are evolving rapidly in changing times. How do you stay ahead of the curve?

In Brief

  • Predictive modelling and other business intelligence tools are speeding up and refining the process of business forecasting and setting budgets.
  • Accountants are moving into a period of continuous business forecasting, based on real-time data.
  • It’s expected that in three to five years, budgeting and forecasting will merge into one activity.

Story Deborah Tarrant

Illustration Christopher Nielsen

As accounting and finance professionals return to work after the summer holidays, their computers barely boot up before their thoughts turn to the work of finalising their 2019-2020 budgets. Increasingly, the planning, forecasting, and setting targets begins more than a year out – with the aim of gaining agreement across the business and approval from organisational leaders, ideally before that perennial 30 June deadline.

In a world of exponential change and disruption, where what happened yesterday is increasingly unlikely to be a predictor for tomorrow, drawing a line in the sand to set a budget tests the mettle of even the smartest financial minds.

“People always complain about how much time it takes them to put together a set of numbers that are out of date by the time they’re locked in,” says Matthew Pieroni, lead partner of Deloitte’s Digital Finance Transformation practice, who works with the firm’s largest clients across the Asia-Pacific.

On the upside, though, “the traditional budget process is evolving as organisations are getting through it in less time, with less effort, and are coming out of it with a fresher, more accurate prediction of the future”, he says.

Access to better, richer information sets – both financial and non-financial – and external data, along with the rise of a technologically-adept generation of young managers (finance professionals among them) who trust in the new tools available for number-crunching, data collection, analysis and prediction, is speeding up and refining the process.

“People always complain about how much time it takes them to put together a set of numbers that are out of date by the time they’re locked in.”
Matthew Pieroni, Deloitte

Moving to continuous business forecasting

Matthew PieroniMatthew Pieroni, Deloitte

“Organisations are starting to limit the amount of time that management spends looking in the rear-view mirror at what happened and why,” observes Pieroni. “Some leading organisations will spend no more than 33% of any meeting today looking over their shoulder, the other 66% is spent looking forward at ‘what we can do’.”

Pieroni anticipates that in the next three to five years – helped by tech advances and having the right skills – budgeting and forecasting will merge into one activity.

“We’re moving into a world of continuous forecasting – real-time forecasting – which provides the opportunity to take interventions earlier if there’s a gap to meet the budget. If the forecast exceeds expectations, you might reconsider what needs to change in the supply chain to deliver that better outcome or lift it even higher.”

Rolling forecasts will give way to a more seamless process in the future, says Pieroni, but the budget, long tipped to be on the way out, is here to stay.

Budgets are essential for setting internal and external expectations, and to provide KPIs for incentives. “Human beings need goals and time constraints, and fixed horizons for those goals … People like to win, and to win you have to be measured against something.”

David Fincher, EY Oceania’s lead partner – Finance and Performance Management, is also seeing budgets and forecasting processes converge. Behind this marriage, he says, is a growing trend in smart organisations to focus on key drivers of business performance rather than financial outcomes.

“People get so fixated on the actuals and updating the forecast based on them that they fail to focus on the future and what’s really happening,” Fincher says.

“With more and more information available in real-time, if organisations are on top of their business performance drivers, in effect they can just continuously forecast,” he confirms. “When you’re doing this, the budget ceases to be a big annual exercise. It can be generated as a snapshot from the forecast.”

Fincher admits there are challenges. “The finance team needs to be working extremely closely with people who understand the market and operations, to marry up demand and supply, and to keep the forecast in sync with reality,” he states.

Predictive modelling and tools that deploy machine learning, artificial intelligence and cognitive intelligence are the enablers, now available to all, and algorithmic forecasting is moving super-fast. “The speed of response is a click of the fingers,” says Pieroni.

Procuring such tools from business intelligence vendors such as Amazon Web Services (AWS), Google or Oracle is as simple as signing up with a credit card and switching it on in the cloud. But as technological capabilities escalate, the experts concur that people will become more rather than less important.

Making data scientists part of the finance team

Randy Wong is a former chief financial officer at several top-tier law firms who now consults on financial transformation to large public and private sector organisations. He is adamant that overarching cultural change is required so both budget and business planning are driven by the chief executive officer.

“A CEO is going to have more influence over executives than a CFO will over their peers. It’s hard to hold executives accountable for budgets and forecasts if they’re purely finance-owned,” Wong says. “Finance’s role is as business partners, for decision support, to provide the value analysis.”

In the future-facing world, the mix of the finance team also may need to look different. “Machines can’t get it right on their own,” admits Pieroni, nor can a finance team comprised solely of people with accounting and commerce degrees, he believes.

“You need data scientists to imagine how the information could be used and modelled, and engineers with good first-principle problem-solving capabilities.”

Across the business landscape, organisations are at markedly different stages with forecasting, and identifying some sticking points.

“Some are getting frustrated because they’ve hired data scientists and thrown them in with their finance people and are not getting results. Others are getting results, but they are struggling to turn insights into actions for people, because they don’t have the softer influencing skills.”

As budgeting and forecasting in effect become one, the right combination of human experience and judgement with intelligent machines will deliver unforeseen value and insights, Pieroni predicts.

“Living documents” for strategy and business forecasting

Laurent Toussaint CALaurent Toussaint CA, CountPlus

At CountPlus, a publicly listed network of 17 accounting and financial planning firms that’s part-way through a successful turnaround and moving into a growth phase, CFO Laurent Toussaint CA, is working hard on calibrating alignment between budget, forecasting and strategy.

Appointed to the top finance job in January 2018, Toussaint, who has a background in international technology consulting and professional services firms, runs on a “no surprises” rule with CountPlus managing director and CEO Matthew Rowe.

“I spend more than half my time on matching our strategy, realigning our forecasts as much as possible, and checking we’re on track,” says Toussaint who, given the nature of the business, notes he’s “the accountants’ accountant”.

For the CountPlus head office finance team of five, the budget process currently is a three-month annual exercise that starts in April and aims for board sign-off in mid-June. It’s helped along by the group’s commitment to cloud-based technology [Xero] and persistent liaising between HQ and member firms, all of whom have principals with “skin in the game”.

The budget is aligned with “living documents” for strategy and forecasting that are reviewed at least monthly and rely on mid-tier analytics tools, including Spotlight and Mondano.

“Budget is sacrosanct, but forecasts change regularly,” says Toussaint. “No-one can predict the future, but scientifically based forecasts are really useful to check if you’re heading down the right path to match your strategy.

“We base a lot of decisions on scenario analyses run through our forecasts. We tag on actuals and run forecasts up to three years ahead, beyond that it becomes more academic. Up to five years is more like impact analysis, but still useful.”

Toussaint and his team scrutinise leading and lagging indicators. “Historical information, such as whether the firms are on track in terms of numbers, that’s very important and allows for some trend analysis,” he says. “But trend analysis can be dangerous because things may be cyclical and change. I need to look beyond the numbers.

“In professional services, the drivers are people, so I look at leading indicators – staff turnover rates, client retention rates, satisfaction surveys and other people elements – which will tell me if the culture and the leadership is right for our growth strategy, and if we need to look closely at possible changes to realign.”

Asked to name his top tool for getting budgets and forecasts chiming harmoniously, Toussaint says it’s “communication” at all levels, from the board through to member firms, not software. “Technology does two things mainly – it creates efficiency in the process and it can take out human error,” he says.

“I spend more than half my time on matching our strategy, realigning our forecasts as much as possible, and checking we’re on track.”
Laurent Toussaint CA, Countplus

Focus on scenario planning

Lauren TempleLauren Temple, Digital Surgery

Budgeting and forecasting gets tricky in the rapid-growth world of a successful international start-up.

For London-based Lauren Temple CA, finance director of Digital Surgery (formerly Touch Surgery) – a company founded by two surgeons in 2013 with the aim of improving surgical outcomes worldwide via an ecosystem of digital simulations – historical data is of limited relevance.

“Everything is changing all the time in the technology space,” says Temple, who previously worked for accounting firm BDO in Wellington, New Zealand, before becoming Touch Surgery’s first in-house finance professional in 2016.

She was tasked with setting up the finance function when the company had just 38 employees. Now with offices across the UK, US, Canada and New Zealand, that number has grown to a workforce of 130, including a CFO appointed after a recent funding round.

“This is such a high-speed environment, we do standard budget setting and forecasting for the P&L, balance sheet and cash flow, but a lot of our focus is on cash runway,” says Temple.

In an essentially lean start-up, Temple uses several Excel-based forecasting models that, with the help of others, she’s evolved over time. The company formally re-forecasts monthly, if not bi-monthly, and chances are it may need to happen sooner. “Scenario planning is key for us, for all the different areas we could go into, new products, technologies or customers.”

“Operating on a global level, different parts of the business and jurisdictions are impacted in different ways, so we are constantly forecasting and reforecasting to give the business confidence to explore unchartered waters because we’re at the forefront of a technology no-one has done before,” Temple says.

The bigger economic picture right now needs particularly sharp focus, as upcoming Brexit changes may affect foreign exchange movements, and political decisions may impact Digital Surgery’s international team of niche talent – many of whom are sponsored.

Temple and her team also keep a keen eye on the labour market, as highly skilled people, including doctors and technologists, are Digital Surgery’s main cost.

“We also need to look at competitors entering the market, and what’s happening in different jurisdictions… The finance team needs to be agile and stay one step ahead.”

“Scenario planning is key for us, for all the different areas we could go into, new products, technologies or customers.”
Lauren Temple CA, Digital Surgery

At the time of our interview, Digital Surgery’s finance team of five had just received board approval for its 2019 budget which is synced to the US financial year. “So in two weeks’ time I’ll be reforecasting to see if we’re still on track for what we predicted last month (November 2018),” notes Temple.

Only one thing is certain in a start-up, next year will be different. So how do they stick to a budget?

“Good question,” says Temple, who admits over the past few years it’s been hard. “We can look back for standard costs, like expenses we have incurred, and sometimes we’re spot on, but we may need to pour money into a new product or new jurisdiction. Who knows what the future holds?” says Temple, adding, “It’s fun. I love it.”

Read more:

Available from the CA Library: The Traits of Today’s CFO by Ron Rael

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