For the past two years – during 2020 and 2021 – corporate financial performance has been affected by the pandemic. This has skewed historical data, making it anomalous. Targets have been missed; budgets have had to be assessed and revised; and trend lines have fluctuated and deviated from the expectations.
Faced with these constraints, is your business intelligence from the past few years of any use? In this blog, we investigate how you can more effectively forecast for the future when your financial planning data has been impacted by the pandemic.
Use the Most Recent Data
Early in the pandemic, lockdowns and closures dramatically changed consumer buying behaviour. Subsequent re-openings and shifting restrictions affected business for many UK businesses.
It took a while for things to stabilise and for companies to adapt where they needed to. The data you now have from various points during the past two years has been affected. Your performance was shaped by the prevailing circumstances and how bad of an effect these had on your own particular industry.
More recently, and especially since the summer of 2021 in the UK, we have returned to a closer version of normality. Many industries have suffered corrections, and some have been permanently changed. But for most companies, their most appropriate strategy is to use the latest trading figures as a basis for modelling future predictions.
Take care to remove any seasonal bias from your forecasts – especially now, if your business sees effects from Black Friday and Christmas. Also, make adjustments that take account of recent upswings in purchasing that have come only as a result of opening up the economy after a time of constraint.
Forecast a Range of Target Outcomes
It is fairly common practice to submit and then consider budgets that are based on low, medium and high forecasts. Then, with some final analysis, the leadership will decide on the most probable scenario to choose as the final plan.
However, it may help to budget based on a range of potential targets. Rather than planning for a single revenue figure, for example, this would instead see the business look at a range of outcomes.
Using ERP software, many different financial models, based on various methods, can rapidly evaluate the prospective results. Companies can then be prepared in advance. Armed with the knowledge of the likely impacts across a range of performance levels, you will then be in a better position to react quickly to whichever scenario is in play.
For the most flexible and agile companies, this kind of planning is perfect as they are well placed to quickly respond as necessary.
Consider Enhancing Scenarios Using Driver-Based Planning
When historical data is uncharacteristic or inconsistent – as seen during the pandemic – using driver-based forecasting can be more appropriate.
Instead of looking at past trends, which have been volatile and uncertain during the pandemic, this approach examines the key drivers of business outcomes. This may include the wider economic landscape as well as organisational factors.
By focusing on the elements that are most important in driving business success, the company’s financial plans are more closely tied to the underlying circumstances.
Place Greater Emphasis on External Factors
In the current climate, external factors that might affect your company’s performance have potential for greater and more lasting impact.
The situation with Covid is still uncertain. So, for some time to come, your own endeavours may still be substantially affected by rapidly changing market conditions or unexpected economic setbacks.
So, it would be wise to model scenarios that take account of the range of possibilities. And to give these external influences a greater weighting than factors concerning your own industry or internal company inputs.
Employ More Dynamic Financial Planning
Plans that cover the full year can be out of date within the first weeks of a budget cycle kicking off. Even a quarterly forecast may be too long term.
Monthly forecasts are more accurate, and where possible, dynamically updated figures that are produced on on-demand basis are preferable.
To achieve this level of precision requires that the projections be continually updated with real-time figures so that predictions are minutely adjusted according to the drivers and inputs.
Automation of the planning and reporting processes helps facilitate and speed up this process. Forecasts for top line figures, like revenue and profit, can be predicted by modelling the underling drivers and economic situation.
Any variance where actual performance looks likely to deviate from the budget can be quickly spotted and the relevant strategic changes can be made and more detailed financials can be forecast.
NetSuite’s integrated planning and forecasting tool incorporates sophisticated modelling functionality based on a powerful calculation engine. It is flexible and customisable to provide you with the business intelligence and precise financial planning to outmanoeuvre the uncertainty of the pandemic. For more information, contact us today.