Forecasting in uncertainty: how to get ahead of the next crisis

We live in an uncertain world. The sudden and unexpected breakout of covid-19 has shone a light on financial institutions’ financial planning and forecasting capabilities, as they scramble to react to a global crisis, and anticipate the impact on their financial performance. More than ever, the Finance function is looked to by the rest of the organisation to provide on-demand information and accurate forecasts for rapid decision making.

The problem is, traditional methods of forecasting and financial planning are not up to the job.

The usual coordination issues that Finance face when trying to plan or forecast across multiple geographical locations, different business lines, and multitudes of stakeholders are amplified by the global lockdown and compounded further by reliance on inefficient processes and outdated technology. Worse still, pre-defined static forecasts and targets can become quickly disconnected from emerging strategy and risk appetite, leading managers in unintended directions. Clunky forecasting processes miss the mark when immediate insights are needed on the customer, liquidity, and capital impacts of something as disruptive as Coronavirus. Now more than ever, inability to forecast quickly and accurately can lead to damaging outcomes.

Clearly in the short term, banks must form an immediate response using the capability they have, in order to take strategic decisions, and to demonstrate to regulators and shareholders their understanding of the potential effects of covid-19. However, in the medium term, banks must look to new, more dynamic ways of planning and forecasting, in order to better react to future shocks, and to gain a competitive edge in times of economic prosperity.

We recommend that firms take several steps to move towards a dynamic approach to planning and forecasting, by:

• Moving to rolling forecasts: Extend past the fixed one-year planning horizon to forecast at least four quarters past the current quarter’s actuals. This allows continuous management of the business based on today’s reality, not through obsolete plans.
• Focusing on drivers, not details: Budgets can reach thousands of line items, but forecasts must be performed at a higher level. Select the most critical line items and model them using a few key business drivers to provide fast, meaningful results and a slicker process.
• Saying goodbye to spreadsheets: Enhance systematic modelling capabilities to lessen the reliance on Excel. Multiple scenarios are extremely difficult to manage with spreadsheets, and errors, broken links, and incorrect formulas require significant time and resource to fix.
• Leveraging new technologies: Consider dedicated cloud-based platforms to increase speed, accuracy and insights, and to enable better connectivity across the organisation. Integrate machine learning techniques to refine the accuracy of models over time.
• Making data clear and available: Business managers need dashboards, not tables, to review forecasts. Make dashboards available directly to business managers, to cut out waiting time for Finance to send over reports.
• Delivering insight as well as data: Providing numbers alone isn’t enough. The business needs commentary to understand the reasons behind movements, materiality, what assumptions have been used and what actions should be taken next.
• Aligning to stress testing: Huge efficiencies can be gained by aligning the people, processes and technology for financial planning and forecasting with their stress testing equivalents. Incorporate emerging priority business risks such as climate change and the impact of ongoing global lockdown in financial plans and forecasts.
• Focussing on continuous improvement: This pandemic has shown that ‘normal’ can change in an instant. Firms must look to continuously refine and enhance their financial planning and forecasting processes to ensure they’re always prepared for the next normal.

Covid-19 has demonstrated the importance to financial institutions of being able to re-forecast and plan with accuracy and speed. Taking these steps towards a more dynamic approach to financial planning and forecasting will ultimately support better decision making, in turn advancing risk management and helping to drive profitability, leading to a competitive advantage far beyond the turmoil of the next few months.

What’s more, when the next paradigm-shifting crisis arrives, institutions can ensure they are better equipped to respond. Fast.