Thought leadership from Unit4 Prevero - October
Posted by Matthias Thurner
Each month we hope to bring you valuable insights from the Unit4 Prevero blog about Financial Planning and Analysis (FP&A).
October provided two thought-leadership blogs about forecasting. The first blog is about the types of forecasting employed for sales and their impact on organizations; and the second is budgets versus rolling forecasts.
Blog 1: What drives the sales forecast? by John Stretch
Sales forecasting is critical. It doesn’t just inform the company of its health, but also the measures you need to take to satisfy upcoming demand. This second question on demand is particularly important to a services company. If you over-forecast you may have consultants, engineers or other highly skilled workers getting paid to ‘sit on the bench’, which raises costs and does nothing for staff morale. But if you under-forecast the performance of sales you may instead not have the resources in place to deliver projects to customers, it has a negative impact on customer relationships and stresses out just about everybody.
You can read the full blog here, but here’s a snapshot on the different approaches to sales forecasting:
A bottom-up sales forecast starts with each salesperson setting a sales target for the next month and the balance of the planning period. The cumulative forecast by each individual sales person is then used to plot a holistic response by the company.
The salespeople of any organization have a fantastic view of their customer, and on paper this seems an obvious forecasting model. But humans are clearly not robotic, and salespeople in particular are driven by multiple incentives when it comes to their own forecast — whether that is to earn greater commission, to not look like a poor performer or to hedge bets. So unless your sales people possess huge self awareness and control, it is generally a path that must be carefully navigated.
A top down sales forecast is more scientific and based upon business drivers. This method feeds economic and other driver projections into a database of existing information, and uses statistical methods to produce a sales forecast. As the Unit4 Prevero blog illustrates, this is incredibly complex and companies need an understanding of the “driver of the driver”. For a hotel, for example, this means a grasp of seasonality, school and bank holidays, sporting events, concerts, festivals, exhibitions, corporate and other conferences, anniversaries and weather forecasts.
What’s the answer?
The great news is that accurate sales forecasting, powered by digital technology, is getting easier. You can find information here on technology that can help you forecast your demand in the short, medium or long term to better understand which products and regions are the most profitable, as well as what combination of sales channels are best, which is the most efficient bonus structure, and of course, the demand your company needs to supply against.
Blog 2: A line manager’s perspective on budgets and rolling forecasts by John Stretch
I loved the second Unit4 Prevero blog this month. It steps into the busy shoes of line manager “Heinrich”, who talks us through the benefits he has experienced since moving from the traditional annual budgeting approach to rolling forecasts.
Reading it, I was struck by the flaws so many companies accept with annual budgeting. Heinrich says: “The budget was always a grudge purchase: I was preparing a set of numbers to keep my boss happy, and to give you FP&A guys something to report against. At the end of the day they were your numbers not my numbers. I knew they’d be out of date within a month or two when we gained or lost a big order or began working a second shift. With the rolling forecast they are my numbers. They reflect my current reality.”
However, the rolling budget approach, delivered through intuitive technology, offers improved features to Heinrich, including real-time alerts on dashboards and weekly summaries of key performance indicators for each area of the business. The financial outlook is updated continuously with more frequent financial reporting than annually.
Tools like this mean top-performing organizations can account for the risks associated with volatile business conditions, and better understand likely outcomes. Essentially, rolling forecasts are based upon the reality of business conditions at that time to ensure that strategic planning processes are shaped continually by the latest data.
If you want to learn more about how rolling forecasts can benefit your organization please take a look here.