Despite its tremendous importance, forecasting remains one of most disliked processes in many companies. Part of the problem are the forecasting templates themselves. They are extremely complex and cumbersome. Today, I want to look at a simple technique that can improve the usability of the forecasting templates while also increasing the ability to gain insights from them. A few months ago, I provided another technique that involved the time-horizon. Let’s take a look!
Typical forecasting templates follow a certain pattern: Across the columns we can find the different months of the fiscal year. The rows feature hundreds of G/L accounts:
Let’s be honest: this type of template is really difficult to use. First of all, there is an excruciating amount of detail. The structure also does nor provide a solid picture of our business. Think about it: Business managers do not think in terms of G/L accounts. You don’t believe me? Thought-leader David Axson once proposed to try this approach at home to see how difficult it really is. This is what our personal forecasting template would look like (oh…please….don’t try this at home….):
We can argue about this, but I doubt that our families would appreciate it. My wife Jen would certainly send me off to see a shrink…
Let’s stick to the example of the personal forecast. If you think about it, most of us intuitively follow a different approach. We use projects and initiatives to structure our thoughts. Many people typically start budgeting or forecasting by creating a list of initiatives they are planning to do. Then they figure out the associated amounts:
This forecasting template provides us with a mental framework that is easy to follow. The naked account list on the other hand does not provide us with any help. We simply think about amounts without being forced to ask ourselves more intricate questions like why, what, where, etc.. And this is what often makes the process so difficult, especially for non-financial people.
The beautiful thing about using initiatives in forecasting templates is that it makes revisions a lot easier. Let’s say we want to cut our expenses by 5%. Using the traditional line item approach, this will become a difficult if not random exercise (how would you know in the first place?).
Where do you start? Most of us would probably be tempted to reduce a few numbers here and there. The data is just too complex. Contrast that to the approach in the next screen shot. This is a lot easier to deal with. The initiatives provide context. All expenses that are not related to a project have been captured in the ‘Sustain Operations’ bucket.
You can immediately sit down and review the different initiatives. Questions like: “Which initiatives are really critical?” come to mind. Ranking them provides additional context.
Next you could drill down on each initiative and review the different expense types. Notice that the use of initiatives speeds up the process while also providing better insights.
Your forecasting templates
Take a look at your corporate budget. Where can you incorporate initiatives and projects in your forecasting templates? Granted this approach does not work in all situations but it is a relatively simple thing to do. But most cost centers can probably benefit from this approach.
P.S.: The screenshots were created with Cognos Insight.