Finance Teams Should Strive to be as Accurate as Possible in Their Forecasts, Even in Times of Great Upheaval.

We’re in unprecedented times. Our forecasts should reflect this.

In the AFP 2020 pre-conference workshop, FORECASTING IN UNCERTAIN TIMES, Carl Seidman, principal of Seidman Financial, provided attendees with both implementation-ready and theoretical approaches for improving forecasting accuracy.

CONFRONTING UNCERTAINTY

The uncertainty brought on by the COVID-19 pandemic and resulting recession has forced many FP&A teams to RETHINK THEIR FORECASTING AND BUDGETING PROCESS. However, Seidman cautions against abandoning these processes entirely. “Generally, I wouldn't suggest throwing out the budget or the forecast because they’re going to be based upon the foundations in your business,” he said.

That said, how do you go about forecasting in times as uncertain as these? According to Seidman, it depends on the size of the company. “For smaller businesses, oftentimes you can literally get on the phone or email your customers,” he said. “You could have conversations and try to understand both what your customers’ numbers are, as well as certain levers impacting their business that would cause them to have challenges interacting with your business.”

For mid-size and especially large companies, contacting all of your customers probably isn’t an option. Therefore, a different approach is needed. “I typically would say, segment your revenues into three channels—existing business, expected business and anticipated business,” Seidman said. “Then, deeply examine each one—every customer, every industry, every size of customer. There are likely to be different dynamics, so rather than take a blanket approach to everything, really try to segment them in a way that's far more palatable.”

Lastly, for companies of any size that want to survive in the current environment, Seidman recommends updating forecasts more frequently. He noted that while FP&A teams obviously want their forecasts to be as accurate as can be, they also need to be nimble and thoughtful as possible. “That usually means forecasting frequently and, again, getting into detail rather than using a blanket approach,” he said. “I wouldn't just go to a group of customers and say, ‘Well, let's just decrease sales by 10% here, and let's increase it by 8% there.’ I'd further segment them to the extent that we can, given what kind of time and human constraints we might also have.”

KNOW YOUR BUSINESS

Seidman concluded by noting that having forecasting success right now hinges largely on how well you know your business. That might very well mean getting to know it even better than you did during the good times. “I think that going through the exercises of forecasting or re-forecasting in a difficult time, you start to realize where you used to be complacent,” he said. “So because you're going to be forecasting more frequently, probably to an increased level of detail, and getting to know your business really well, you’re going to understand what you haven't been doing well and what you can do better.”

Source: AFP (September 14, 2020)