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Developing Effective Financial Forecasts

ADDING VALUE TO YOUR BUSINESS.Moore Stephens IT Solutions

16 May 2018

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Choo Kwong Chee (KC)

Background: 18 years of consulting experience helping clients

transform their business using technology

Current: Director, MS IT Solutions

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Agus Tirtoredjo

Background: 20 years of consulting experience in ERP, IT Strategy,

Enterprise Architecture, Professional Services

Current: Director, MS IT Solutions

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About MS IT Solutions (MSIT)

MSIT is an associate of Moore Stephens International

Limited, a leading accounting and consulting association

with member firms in principal cities throughout the world.

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▪ Compare against plan

▪ Make course corrections

▪ Predictable performance

▪ All of the above

Poll: Why do you forecast?

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Poll: How often do you forecast?

▪ Once a week

▪ Once a month

▪ Once a quarter

▪ Every 6 months to once a year

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Companies with

forecasts that came

within 5% of actuals

saw a 46% increase in share

price over a 3-year

period

Source: KPMG

1 in 5 companies

currently produce a

forecast that is

reliabled

22%of forecasts

come in within

5% of actuals

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A changing business landscape.A need for predictability demands better forecasts

Top-Line

Workforce

Expense

Cash Flow

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Business Landscape

Marketing

Demand

Gen

MAS

Social

Events

Targets

Reporting

Capital

Financial

Statements

ERP

Finance

KPIs

Operations

Real Estate

Hosting

IT

Manufacturing

MRP

Quota

Pipeline

CRM

Comp

Plan

Partners

AgreementsRamped

Reps

SQL

Sales

Productivity

SQL

Coverage

ContractorsEmployees

HCM

Benefits

Hiring

TMS

HR

Executive

Dashboards

BI

Investor /

BOD Packs

Collaboration

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Integrated Data

Comprehensive Models

Rolling Forecasts

Scenario Planning

4 Tips to Improve Forecasting

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1

3

4

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1. Integrated Data

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A. ERP (NetSuite, Oracle, SAP, etc)

B. CRM (SFDC, Microsoft, NetSuite)

C. HCM (Workday, Oracle, Namely)

D. MAS (Eloqua, Marketo, HubSpot, etc)

E. Other (Proprietary database)

Poll: What systems do you access for your forecasts?

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Just Not Enough Time

Data prep, waiting for data and assisting with

data reviews are other areas that slow

organizations down.

Accessing data is a top obstacle for accurate forecasts and predictive analytics in 35% of organizations.

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A Centralized System to Deliver a Single Source of Truth

Eliminates confusion among competing data sets

Stops the debate over whose numbers are correct

Refocuses the leadership discussion towards insight and action

Enables a consistent view of data across the organization in real-time

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2. Comprehensive Models

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1. Income Statement

2. Balance Sheet

3. Cash Flow Statement

4. All of the above

Poll: How comprehensive is your forecast?

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Integrated Model

Demand

Gen

Social

Events

Targets

Reporting

Capital

Financial

Statements

Real Estate

Hosting

IT

Manufacturing

Quota

Pipeline

Comp

Plan

Partners

Agreements

Ramped

Reps

Productivity

Coverage

Contractors

Employees

Benefits

Hiring

Dashboards

Investor /

BOD Packs

What-if

Growth

Competition

Currency

Investment

Reduction

KPIs

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Collaborative Forecasting : Brainstorm with Business Partners

Continuous:

Use the right tools

Collaborative:

Get buy-in from

the top

Comprehensive:

Use Analytics to

identify metrics that

drive growth

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3. Rolling Forecasts

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E

n

d

o

f

Y

e

a

r

“The Wall”

Actual Actual Actual Actual FcstActual Actual Actual Actual Actual Actual Actual

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Issues with Static Budgeting

▪ Requires detailed projections and plans upfront.

– Prepare in Q3 (15 months ahead).

▪ Outdated once finalized.

– 90% of companies don’t change resource allocation to reflect changes in strategy or environment.

(Deloitte)

▪ Focus not on driving success of organization.

– Use-it or lose-it mentality. Focus on securing resources.

– Least-risky mentality. Focus on accuracy.

– Sandbaggers and Optimists mentality. Focus on performance measurement.

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What is Rolling Forecast?

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Benefits of Rolling Forecast

▪ IBM study:

– 12% more forecast accuracy

– 50% less budget preparation time

– 10% more profitable

▪ Maersk case study:

– Replaced budgeting process with rolling forecast.

– “Design criteria”

• Visibility: Forward looking

• Agility: Early identification and correction

• Control: Balance scorecard driven

• Simplicity: Removal of unnecessary details

Source: London FP&A Board

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Defining the Forecasting Horizon

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Horizon depends on industry.

▪ Align to business cycle.

▪ Look at least four to eight quarters past current quarter.

Guiding questions to determine horizon:

▪ What is the speed of change in my industry or business?

▪ How intensive are the capital requirements?

▪ How long does it take to bring facilities online? Months or Years?

▪ What are the lead times for our products?

▪ How long does it take to change supply contracts?

▪ What is involved in adjusting marketing programs (or other drivers of demand)?

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•Part Driver based model

•Forecast as measurement

tool

•Two processes: Traditional

and Rolling

•Average level of detail

•Average collaboration

•Some predictive Analytics

•Partly automated processes

•Inflexible FP&A system

Rolling Forecast Maturity

▪ Enablers to adoption:

– Automated processes

– Driver-based model

– Analytics

– Collaboration

– Flexible FP&A system

“Attempting to do a rolling forecast

for a multimillion or multibillion-

dollar company in Excel is almost

impossible.”

Association of Financial Professionals

20% of companies abandon Rolling Forecast. Why?

Source: London FP&A Board

Basic

•Static model

•Two processes: Traditional

and Rolling

•High level of detail

•Basic collaboration

•Basic Analytics

•Manual processes

•Excel

Intermediate Advanced

•Driver based model

•Forecast as management

tool

•Rolling forecast replaces

Traditional Budget

•Simple and Agile process

•Good planning

collaboration

•Advanced Analytics

•Automated processes

•Flexible FP&A system

…because they are stuck at Basic level. Why?

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Example in CPM tool

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5 Steps to On Board Your Business with Rolling Forecasting

1. Model on Drivers, not details.

– Simplify for frequent forecasting.

– Select high-materiality, high-volatility items.

2. Use rolling forecasts to sound out multiple “what-if” scenarios.

– Best-case, worst-case, base-case

3. Delink from targets, measures or rewards.

– Objective forecasts based on real business demands and business environments.

4. Choose the right forecasting

horizon for your industry.

– Align to business cycles, not fiscal year.

– Look 4 to 8 quarters past current quarter.

5. Don’t attempt with Excel.

– Use a Corporate Performance

Management application.

– Provide management with clear, real-

time view of progress with Dashboards.

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4. Scenario Planning

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Planning for Multiple Futures

Source: Monitor Company Group

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Why Scenario-Based Planning?

▪ To prepare organization for effects of multiple potential futures, so as to enable agile and timely

responses.

▪ To understand the impact of a key scenario (e.g. its impact on financials, targets, cash, funding, KPIs)

▪ Direct time toward more strategic activities, e.g. contingency planning

▪ Extent:

– Fundamental changes in strategy caused by global paradigm shifts

– Tactical contingency planning focused on possible near-term developments

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1. Political

2. Economic

3. Social

4. Technological

5. Environmental

6. Legal

External Influences - PESTEL

Source: The Wall Street Journal

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1. Supplier Power

2. Buyer Power

3. Competitive Rivalry

4. Threat of Substitution

5. Threat of New Entrant

External Influences – Porter’s Five Forces

Source: The Wall Street Journal

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Identifying Patterns (Sets of Outcomes)

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Deriving Scenarios

Source: Kees van der Heijden

Impact/Uncertainty Grid Scenario Matrix

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▪ Manufacturing: Product cost increase, new factory opening

▪ Non-Profit: New program or service, increased funding

▪ SaaS: Bookings growth, collections, payables (to forecast cash)

▪ Services: New clients, new service lines

▪ Healthcare: Census (patient) level adjustments, capacity planning

▪ Holding Companies: Proposed acquisition

Scenario-Based Planning Examples

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• Outperformed peers by

10% on Revenue Growth

• Outperformed peers by

8% on Operating Margins

• Had more streamlined

decision making

Organizations using scenarios:

When Done Right, Benefits are Real

Financial Planning, Budgeting, and Forecasting: Removing the Hurdles, March 2013

Rolling Forecasts Enable Accuracy and Agile Business Planning, May 2013

Higher

Revenue

Growth

Higher

Operating

Margins

+8%+10 %

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• Lack of Process

• Systems and Technology

• Collaboration Challenges

Typical FP&A attempts at Scenario Analysis do not result in actionable to-do’s because of:

Despite the Benefits, Still a Minority Practice

Scenario Planning

64%

14

%

20%

Explore

relevant

scenarios

Don’t

explore

more than

1 scenario

36%2%

Explore

scenarios,

but not all

optionsDon’t Use

Do Use

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▪ Typical steps:

Scenario Planning in CPM: 1) Corridor Planning

▪ Alternative outcomes of a “base case” scenario.

▪ What if key assumptions are slightly exceeded or missed?

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▪ Look at scenarios on “and/or” basis.

Scenario Planning in CPM: 2) Combined Scenarios

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▪ Create alternative scenarios that are interlinked where the only difference is the timing of

the event. Eg. Major acquisitions.

Scenario Planning in CPM:3) Delayed Scenarios

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Example in CPM

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Integrated Data

Comprehensive Models

Rolling Forecasts

Scenario Planning

4 Tips to Improve Forecasting

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1

3

4

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We Can Support Your Evolution

EnhancePlanning

OptimizeFinance

TransformPerformance

Automatic rollups

Fewer errors

Faster cycle times

Integrated actuals

Driver-based models

Full financial statements

Collaborative processes

KPIs & metrics

Companywide planning

Culture of analytics

Strategic scenarios

Business model evolution

Increase

Efficiency &

Accuracy

Improve

Processes &

Decisions

Create

Profound

Strategic Value

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CONTACT US:

Agus Tirtoredjo Kwong Chee (KC)

agus@msit.com.sg kwongchee@msit.com.sg

M: 91059374 M: 96924272

MS IT Solutions Pte. Ltd. is an associate of Moore Stephens International Limited, a leading

accounting and consulting association with member firms in principal cities throughout the

world.

About Moore Stephens globally

Since Moore Stephens London was founded a century ago, Moore Stephens International

Limited has grown to be one of the largest international accounting and consulting groups

worldwide. Today the network comprises 657 offices in 106 countries throughout the world,

incorporating 27,613 people and with fees of more than US$2.660 billion. You can be

confident that we have the resources and capabilities to meet your needs.

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