There were a couple of interesting statistics that were recently published in a CFO Dive article that made us really curious about how accounting departments are leading the companies they work for.
Only 20% of CFOs feel they can forecast revenue and earnings beyond a one year mark. This is largely due to the growing demands of the finance office to run operations more efficiently and living in the “here and now” instead of focusing on the medium- and long-term.
Only 4% of CFOs actually set aside significant time for scenario planning. Although there can be many reasons for this, the biggest one is that there is not enough staff nor the correct technology in place to make it a worthwhile investment of time and money for the finance department.
If we’ve learned anything this past year, it’s that we must be nimble and able to pivot more than ever before. As of the date of this blog, the CDC has begun to lift restrictions related to wearing masks and maintaining social distancing, signaling that we may be returning to “normal” (whatever that means). However, this does not lessen the need for a company to forecast and scenario plan in order to be prepared for factors that may or may not be foreseeable — particularly in an increasingly virtual world that has undergone a major digital transformation.
Business owners and entrepreneurs cannot afford to ignore what the foreseeable future may hold, yet they don’t always have the necessary tools and manpower to adequately prepare. How do we reconcile the difference between the lack of time and tools needed for CFOs to feel comfortable forecasting and the ever-growing importance of having to prepare for any conceivable situation?
Invest in IT: A major reason why people, in general, don’t feel that they can accurately forecast or budget their operating results beyond a year is they don’t have the integrated tools to do so. The optimal way to budget and forecast is to have integrated ERP (SAP, Oracle, Netsuite) that will allow you to access data from the same database. For those that don’t have funds to invest, there are more affordable tools for business intelligence that are easily implemented on top of your existing technology tools, as well as business intelligence tools like Prophix, Cognos, or Microsoft Power PI that pull in data on a more unified basis. Having strong technology tools in place will allow workers to focus less on processing numbers and more on reviewing numbers and analyzing data.
Change the Budgeting Process: Most companies will implement their budget once a year and then track results against the budget throughout the year to see how well they’ve done. The weakness in this process is that by the time you get to the fourth quarter, many of the assumptions that you used for your budget are no longer applicable — and therefore the comparisons don’t make much sense. Instead, we strongly suggest forecasting as part of your monthly process in order to have a more meaningful comparison of results based on current circumstances instead of stale assumptions. We also recommend reviewing the results on a rolling basis, such as a 12-month or 14-month forecast as part of your monthly close process. For example, at the end of the April close, you would forecast your operating results and cash flow for the 12 months starting in May 2021 and ending in April 2022. Having a rolling forecast process as part of your month-end close will enable you to look at your current marketplace consistently and give you a current and consistently evolving view of how you’re operating in the current marketplace.
Make the Time: Simply put, a CFO who is not forecasting for the remainder of the year or foreseeable future is not adding value to your business. While this statistic may be impacted by technology shortfalls or lack of personnel, the reality is that businesses prioritize and make time for things that are important. All SMB owners should definitely devote time to figuring out where they are in comparison to their competition. Without devoting this time to such a critical process, it will not be long before your competitors start stealing your customers away and eat your lunch.
Things can happen very quickly on a global basis. It is imperative that your finance function is continually analyzing its operating results and planning for scenarios that, while unlikely, could devastate and potentially bankrupt your company. A primary objective of the accounting and finance function is to provide information to a business owner so he or she can maximize return on investment while minimizing risk of failure. Without the proper technology, policies, and procedures in place, a company’s ability to react effectively to any number of obstacles will be severely limited.
Take-away: If you feel that your finance department is not performing at an optimal level or is incapable of providing the guidance that your business needs, AcceleratingCFO can provide the guidance and blueprint needed to transform it into a first-class finance organization. For a free diagnostic or consultation, contact Brian or Scott at info@acceleratingcfo.com.
Co-founders & Managing Partners
AcceleratingCFO
