Delayed financial forecasts jeopardize timely decision-making. When external shocks and disruptions strike, the ability of leaders to act quickly based on reliable information can determine whether an organization moves ahead or falls behind.
When forecasts signal impending demand growth or losses, organizational leaders need as much lead time as possible to make course corrections. Overly detailed or labor-intensive forecasts waste precious time that could be spent managing growth or preventing further setbacks. By producing reliable forecasts fast, finance managers can improve business performance and position the organization for success.
With stakes this high, tracking the finance team’s cycle time to prepare financial forecasts and looking for ways to increase efficiency — all while maintaining quality — are important activities that usually prove to be worth the effort.
Cross-industry benchmarking data from nearly 3,900 companies collected by the American Productivity and Quality Center show that high-performing companies produce financial forecasts in eight days on average, compared with bottom performers, which take twice as long. Median cycle time is 11 days. These numbers generally reflect a quarterly forecasting process, including updating the rolling profit-and-loss forecast.
In the eight-day gap between the top and bottom performers, geopolitical conditions can change completely. A week can make the difference between a prompt response to reduce staffing or scale back production and the need to execute mass layoffs or incur additional debt. Over a year, the slower group will need an extra month to prepare forecasts compared to the fastest group.
Cycle time to prepare the financial forecast is a significant indicator of management effectiveness. It affects various aspects of the business, including cost control, internal process efficiency and staff productivity, as well as providing the basis for strategic agility. Balancing speed with accuracy allows CFOs to act more quickly to support the strategic goals of their organizations.
Strategies for improving cycle time
For companies at the lower end of the spectrum on this metric, there are several proven strategies for improving performance. Which approach is right for your organization depends on the specific context, including organization size, complexity, industry and market variability.
Importantly, simply forecasting more hastily or demanding that employees work faster risks producing lower-quality deliverables and omitting critical variables. Here’s how CFOs can meaningfully increase efficiency to reduce cycle time in forecasting.
1. Keep it simple. Examine the underlying assumptions and variables included in the forecasting model. Which variables are essential? Are any inputs adding unnecessary complexity? Are you spending time tracking down exact figures when any value within a reasonable range would not affect your forecast one way or the other? If you can simplify your forecast, a faster turnaround time becomes more achievable.
2. Form and function. Scenario-based forecasting often involves multiple potential outcomes or ranges based on different variables. When circumstances are in flux, decision makers might request or need multiple scenario-based forecasts. Sometimes, creating multiple scenarios or range-based forecasts with probability scores can save time compared with trying to fold every important variable into a single, reliable forecast. It’s important to carefully consider these different options to find the best fit under the specific circumstances, to strike a balance between speed and quality.
3. Integrate and automate. When different sources of data can be pulled automatically from different systems into your forecast, the chances of human error and, thus, delays in production decline dramatically. For systems integration to save time in forecast preparation, however, finance leaders’ confidence in the data, the systems and the integrations must be high. If this is lacking, then testing, auditing and validating the data can increase confidence, which ultimately translates to reduced cycle time.
4. Alignment with cross-functional teams. When financial data and reporting are consistent across the various functions of the business, the amount of time needed to reconcile different styles and systems is considerably reduced. Finance leaders must also communicate the importance of operating forecasts to other leaders across the organization. Input from a variety of divisions or departments is needed to generate a reliable forecast that empowers leadership to navigate through challenging times. When everyone recognizes the critical nature of forecasting, they are more likely to act quickly to get you the information you need.
CFOs who are performing at the higher end of the spectrum on this metric might have little room to improve speed. But the considerations mentioned above also represent opportunities to increase forecast quality without extending the cycle time.
Tailor forecasting processes
In challenging and unpredictable times, speed is paramount. Streamlining the forecasting process provides key stakeholders with the information necessary to make timely strategic decisions. More time means more options for responding, increasing organizational agility and resilience.
Overall, financial managers must carefully calibrate forecast-related processes to meet the level of specificity and frequency that the economic, market and internal stakeholder dynamics demand.
