One of the essential aspects of the financial planning cycle is the need for accurate forecasting, which is not always an easy task. Serious stumbling blocks frequently prevent finance teams from performing good forecasting, which is crucial to strategic financial planning.
This article will explore the major causes of financial forecasting inaccuracies.
Lack of data credibility
Many forecasts have credibility issues, ranging from incomplete information to disconnected data within the forecast. Frequently, forecasts fail to tell the true story of where the business is headed.
A forecast will be ineffective without credible data. It certainly will not support those critical leadership discussions, nor will it instill the necessary trust in the numbers within the organization. It will also have little value and thus have little impact on the business.
There are a few solutions that can assist manufacturers in resolving quality issues and obtaining the valuable data required to drive business decisions.
To begin, finance teams should devote time to implementing structured processes, checks and balances, and analytical procedures that will allow them to compile accurate forecasts based on credible data consistently. Then, teams can implement workflows and structured templates to enable easy replication and consistent data presentation across business functions. Finally, invest time developing your finance team into trusted business advisors, increasing your organization’s credibility and decision-making capabilities.
Lack of Alignment
When it comes to planning and forecasting, organizational alignment ensures that business leaders understand the numbers and understand how to achieve the company’s financial objectives.
Finance teams must collaborate across departments to assess their leaders’ understanding of the forecasting and planning process before aligning goals. Do all leaders in your organization consider the financial implications of their decisions? Is everyone on the same page with their priorities and heading in the same direction?
Make your team more cohesive by getting everyone on the same forecasting page and planning path.
Problems with operational data
Problems will arise during the reporting and analyzing process when necessary to leverage operational data for insights. The data is either not in an easily accessible format or challenging to diagnose, especially when there is a business issue.
Furthermore, businesses aren’t always able to report on critical metrics on time, and not everyone in the organization understands what those metrics mean. The data does not support the performance metrics required by the business.
Real-time reporting using financial forecasting software like Performance Canvas can be highly beneficial in assisting finance teams with operational data issues. Software with built-in dashboards and optimal visibility allows teams to easily pull and analyze data from anywhere, at any time. Advanced analytics programs also enable teams to solidify the data they collect and deliver it to leaders who require it to make critical business decisions.
Financial consolidation problems
Finance teams want to reduce the number of days it takes to close books. The faster the time this is completed, the better room is left for business leaders to make sound business decisions. When closing is delayed, executive management will not have access to critical information promptly to support their choices.
The right financial forecasting software tools can simplify this process and help compile, organize, and deliver financial information in a format that business leaders can easily understand. Teams can go a step further by investing in software solutions like Performance Canvas that improve financial closing by creating automated, dynamic journal entries that pull the appropriate amounts from the correct accounts to create eliminating, controlling interest and reclass entries.
How Performance Canvas Can Help With Accurate Forecasting Methods
Financial planning and analysis assist businesses in achieving their objectives and moving forward with purpose. You can help your manufacturing company develop a plan that promotes clarity, informs leaders, and fosters effective decision-making by recognizing and avoiding these five forecasting pitfalls.
Inaccurate forecasting can lead to incorrect judgments that can harm your company’s growth rather than a positive one. Your company will be undervalued if you disclose minimal profits. It’s also possible to pay much money in taxes if profits are incorrectly calculated. The first step in a company’s growth strategy is to ensure that its data and forecasts are accurate.
Businesses may have had to deal with inaccurate forecasts for years because they’re overwhelmed with where to get started. But if business owners continue to take these statistics at face value, it can be more challenging to track profits and budgets effectively. Investor relations can suffer when forecasting errors hound businesses.
The good news is that cutting-edge FP&A software like Performance Canvas can deliver accurate and frictionless forecasting for businesses of all sizes. It’s a complete performance management tool that includes financial forecasting, reporting and budgeting.
Need assistance with financial planning and analysis or selecting and implementing forecasting tools?