Why reforecasting is crucial in financial planning

Budgets and forecasts need to work together. When finance teams and business leaders can track actuals versus budgets, reforecasting can become timely and accurate. This helps your strategic planning stay on track and allows you to deal with major changes in your business environment.

Although most finance professionals understand the benefits of reforecasting, it happens infrequently. This is due to a lack of self-serve tools and manual data consolidation which makes the process very time-consuming.

What is budget reforecasting? Is it an important business process?

Budget reforecasting is, simply put, adjusting your business forecasts whenever there are substantial market changes. These can be major changes and variances that you’ve identified in regular budget vs actual reporting, or major changes to supply chains and buying patterns that require a change to your strategic plans.

Let’s face it, budget forecasting is rarely a set and forget process. In a recent survey of Phocas customers looking to enhance their planning, the biggest challenges identified were (1) cash flow forecasting and (2) budget reforecasting.

With ongoing global supply chain disruptions and customers constantly seeking better deals, it’s common for assumptions to not hold up in your budget. That’s why reforecasting is crucial to keeping your company’s plans aligned with its current financial and operational situation.

Why data automation helps the reforecasting process

The key to continual reforecasting is good data. The same principle applies to building your budgeting process. To ensure that budgets, forecasts and actuals are aligned, we recommend using detailed financial and operational data that is accessible from an all-in-one BI and FP&A platform. It should include a wide range of business data and everything from quantities sold last month to customer numbers, marketing leads, energy usage – everything that is relevant to your decision-making. Data automation enables you to build annual budget models, track performance by comparing actuals with the budget year-to-date, assess results and variances through dashboards or charts and save everything in one place for reforecasting.

As you progress through the fiscal year, the BI and FP&A platform helps you roll the budget into a forecast. The forecast allows you to overlay actual performance onto the budget and update forecast figures back to the respective databases and line items. You can edit the forecasted figures and publish them to compare against both the original budget and revised forecasts. All this data is captured within one platform, providing timely insights in real-time.

When to reforecast

There will always be fluctuations in your budget that need attention. By using a BI and FP&A platform you can regularly monitor budget versus actual figures through dashboards.

With daily access to new financial and operational data, the CFO and other stakeholders can quickly spot significant changes in revenue or expenses, getting immediate warning of the need to review and adjust your budget forecast.

Another advantage of the BI and FP&A platform is the ability to track key budget drivers, such as performance per sales rep. When you review sales figures for the month and see they are substantially up, you can investigate in more detail across different divisions.

For example, you find that three sales reps in America are 40% over target - a significant deviation. This makes you remember a conversation you had with the head of sales who suggested some of his people hold back their deals to undermine their financial forecasts and lower expectations. Now that you have seen this in the actuals, you’ll need to check back in with the head of sales and increase the targets for these people in the reforecast.

Once these increases are made with some quick percentage changes – the system automatically updates all the financial statements showing you the changes to revenue streams, profit and cashflow. You can also report back and quickly build a dashboard to explain to stakeholders the effects of the new forecast on the business’ key performance indicators.

Put your reforecasting data into action

Reforecasting your budget means putting the data to work and moving on from a static budget. With a BI and FP&A platform, you can quickly incorporate new findings into your forecast. We’re not suggesting you need to always make wholesale changes but rather keep the financial position clear so people can make informed decisions.

Top tip: Performance doesn’t have to be negative to reforecast

For example, you might open or close a branch, which can have a knock-on effect on staff levels. The headcount tool in the platform allows you to reforecast and address staffing expenses including superannuation, medical benefits and pension requirements. Whether you need to let people go or hire more, having accurate information for stakeholders is crucial to guiding these important decisions.

A BI and FP&A platform also supports 3-way forecasting, helping you maintain control over cashflow.

Mini drivers represent the links between your statements. You can use the mini drivers to forecast your Balance Sheet items, so your cashflow better reflects reality. Phocas includes three templates for common scenarios involving debtors, creditors and stock. These templates have pre-built lines with basic inputs for calculation. A good way to start is by checking the trade receivables sparklines. If these payments are flat but you know average debtor days are more than 30 days, the figures may not accurately reflect the situation. You can reforecast to 35 days and make sure that debtors are now moving in line with how your sales are moving.

Incorporating regular reforecasting into your budget process will ensure everyone has accurate information to hit targets and be informed and confident when challenges arise.