“Prediction is very difficult, especially if it's about the future."

--Nils Bohr, Nobel Laureate in Physics

Predicting the future has never been easy.  And in today’s dynamic and global environment, it’s harder than ever.  Yet despite the difficulties, an effective forecasting process is essential to properly managing a company.  Numerous stakeholders, both internally and externally, depend on the forecast to evaluate the health and direction of the company.

Despite the importance of an effective forecasting process, many companies continue to struggle with a process that is highly manual and time-consuming, and that yields information that is often inaccurate and quickly obsolete.

There are various challenges that contribute to forecasting difficulty:

• Management Expectations: Most management teams like detail and forecasting is no exception.  Most forecasts are far too detailed, creating a lack of focus on the key drivers that “move the needle” on revenue and profitability.  A large amount of detail in the forecast requires more information, and turns into a data collection exercise instead of focusing on the insights produced by the forecasting process.

• Data Management: The monthly close cycle of many companies prohibits the timely collection of data.  Additionally, the level of granularity provided by the accounting process is often inconsistent with the forecasting requirements of management.  Finally, quality operational data is required to understand the drivers of revenue and cost, yet this is exactly the type of data that is difficult to retrieve from a company’s information systems.

• Disconnects Between Forecasts: Companies have multiple forecasts.  Sales, Operations, Marketing and Finance all have different forecasts with different models, assumptions and time horizons.  When there is a disconnect between the various groups, it is virtually guaranteed that the financial forecast will be inaccurate.

• Technology: Despite the millions of dollars invested in enterprise technology, many companies still rely on Excel spreadsheets to collect, consolidate and report forecasts.  This leads to a highly manual effort that requires substantial time.  The use of spreadsheets makes multiple updates of the forecast difficult and error prone.

• Organizational Culture: All too often managers are castigated for producing results below forecast.  As a result, managers are tempted to “game the system” by forecasting on the low end of expectations with the hope of ending above expectations at month-end.  This can lead to deliberately inaccurate forecasts.

In a subsequent post I'll discuss ways to create a more effective forecast.