CFOs and their staffs who are thinking about increasing the use of their forecasts should heed a warning sign from a new survey: Eighty percent of mid-size to large companies are making hay out of less than one-half of their potential productivity of their budgeting and forecasting efforts.
The findings are from a global survey of 138 CFOs, financial-planning-and-analysis directors and controllers taken during the first half of this year by CEB, a member-based advisory.
The time it takes to go through the forecast process has something to do with why corporate executives are not getting as much out of their forecasts as they might hope. Eighty-two percent of the respondents are dissatisfied with the time put into the forecast, while 18 percent are satisfied.
Respondents also cited “timeliness” (45 percent) as one of the most important attributes of their forecasting process followed by the “depth” (33 percent) of the forecast and how accurate it is (26 percent). Those attributes, along with “transparency,” “insight,” “clarity,” and “efficiency,” make up CEB’s newly created Process Productivity Index, which can be used to assess the value corporate executives place on forecasting and budgeting. The majority of respondents believe that there is “significant room for improvement” in all of the forecasting attributes cited in the index.
While companies do look at timeliness and accuracy in forecasting, few evaluate total process costs or the value of the output. “The most important measures of process efficiency and quality are rarely tracked,” the report said.
Still, there is a better way to forecast accurately, according to the report. CFOs and their staffs need to avoid using an accounting-driven, forensic approach and instead prioritize among the forecasting variances that might occur. “The best FP&A teams treat the root causes of variance by distinguishing controllable from uncontrollable performance drivers, and doubling-down on accuracy in the underlying assumptions.”
The report also said leading companies ensure that executive management teams have agreed upon the goal of forecasting efforts before attempting process improvements. Efforts to improve budgeting and forecasting processes before agreeing upon goals have yielded disappointing results, the report notes.
Despite their discouragement over their forecasting, respondents are certainly not giving up on it. Seventy-three percent of those surveyed consider forecasting to be a “valuable activity.” This compares with 55 percent who said the same about budgeting.
Some of the unfavorable tone towards budgeting comes from having too many objectives under the “budget” heading these days, notes the report. “The budget has become a catch-all tool for a variety of management objectives, reducing its effectiveness as a resource allocation instrument and driving unhealthy managerial behaviors.”