Volatile markets make financial forecasting more challenging. When future revenues and costs are more uncertain, so is cash flow. Here are 16 ways to improve forecasting, including how contract management software can improve precision and speed.
Market volatility and uncertainty make financial planning more challenging. Revenue forecasting, cost forecasting, cash flow forecasting – all get more complicated when the future is less predictable.
However, times like those are also a great opportunity for a CFOs and financial departments to seize the moment. Let’s say you are alert, leverage a handful of techniques, and use digital tools in the right way. That could substantially improve both your own as well as the company’s prospects.
A Deloitte study shows that using data capture and AI tools is key to making accurate forecasts and insights. To achieve automated financial forecasting you need to create a robust data foundation, with high-quality, continuously updated data. This is key if financial forecasting processes are going to take the next steps using advanced algorithmic models and analytics tools.
Whether or not your finance team is using AI, you want to improve speed and accuracy in their processes. This is especially important during uncertain times, when predicting finances is crucial for the company's financial well-being.
Achieving automated forecasting requires not just technical capabilities and a data-centric culture. Classic finance department virtues are still in vogue, including a deep understanding of business processes. This approach emphasizes the importance of continuous improvement and the strategic use of technology in financial forecasting.
Improving financial forecasting, especially in uncertain times, involves steps similar to those needed to start using AI. This is good news for those looking to enhance their financial planning. In this article, we want to share with you 16 tips on how to improve financial forecasting.
Most of our customers use contract management software to enhance forecasting processes. We talked to House of Control's customer success managers to learn the best practices, including contract strategies. We also studied reports from PwC, Controllers Council, and Gong, to gather information. Here’s what we found:
Imagine different futures for the near term prospects - the optimistic, the pessimistic, and the neutral. Preparing for various outcomes prepares you for what reality will look like.
Digital tools can sift through huge amounts of data quickly, spotting trends humans might miss. This is not about replacing your team but giving them superpowers to see patterns and insights that help make better forecasts.
Old data is unfit for forecasting a probable tomorrow. The world moves fast, and so should your forecasts. Instead of checking in yearly or quarterly, monthly updates - or even more frequent ones – can keep you in tune with the latest shifts.
Collaboration across different organizational functions to gather relevant data enhances the forecasting models. To get a better sales forecast, talk to your colleagues in sales, marketing, and other teams to get their insights. What are their latest impressions of where demand is evolving? The more heads together, the clearer the picture you'll paint of the future.
What's happening in the world, in your industry, and on social media can all impact your business. For example, most countries have a purchasing manager's index and other surveys looking into the future of demand. Include these external factors to get a well-rounded view.
Financial forecasting needs flexibility. If something unexpected happens, change your forecast to fit the new facts. Encourage a culture where it's okay to adjust plans based on new information. Contract management software allows for quick updates.
Further reading: 9 ways to cut costs during challenging times
Complex forecasting models can be hard to understand and thus a less useful tool. Aim for simplicity to make your forecasts clear and easy to adjust as needed. This also helps everyone in the company understand and trust the forecasting process.
Not all forecasting tools and models have the same quality. Pick ones that fit your industry, size and growth phase. Consider how detailed they need to be and how often you'll need to update them. Using contract management software helps you keep track of upcoming obligations. It also allows you to easily identify the contract owner. Additionally, you can receive notifications in advance of important deadlines.
Pay close attention to the data you're using to make forecasts. Choose carefully and look for ways to improve prediction accuracy. Contract management software has features for analyzing past and future cash flows. With these, you can predict trends and potential issues.
Knowing what influences your business can help you anticipate how changes in those areas will affect you. This is about being ready with a plan B (and C and D) for different scenarios that could unfold.
Cost and revenue forecasting should be efficient, and high-quality data should be easy to obtain. Contract management software takes away the tedious task of manually entering contract details, including payment plans. By leveraging such digital tools, you can base your forecasts on up-to-the-minute data with minimal effort.
With contract management software, you can see important contract details in real-time. This allows you to quickly adjust forecasts based on current information, for example price changes.
As mentioned above, forecasting is a cross team activity. Contract management software makes it easy for teams across your company to share insights and data. This ensures that your forecasts are well-rounded and take into account different perspectives.
Software-as-a-Service (SaaS) costs as well as revenues are usually tied to contracts. Contracts usually tie the costs and revenues of Software-as-a-Service (SaaS). So are office rent, car leases, media subscriptions, energy supplies, and many more. During uncertain times, it's important to carefully plan revenues and costs in financial forecasts to prepare for different outcomes. Plus, using a contract management software will massively improve how you manage IFRS 16 leases.
According to PwC, complex models often rely on certain people within an organization to maintain and update. These models risk becoming a “black hole” and key person risk. Well structured, simple to follow models are easier to use and adapt. They also promote transparency, reduce key person risk, and decrease the likelihood of concealing errors.
Another insight from PwC: Sweat the inputs to refine the outputs. Forecasting costs and especially revenues will always rely on assumptions regarding data. What historic data sources or benchmarks have you used in setting input values? And when were our core business models last independently reviewed for best practice and/or accuracy? Finally, test, test, test. Models with errors can be very costly for an organization when outputs impact business decisions, and more so in volatile markets.
Further reading: How to build a business case for investing in contract management software