One fact staring us in the face is that AI will automate many tasks that the finance team currently performs, and at the same time, render many aspects of their business redundant or impact them by new players.

Finance teams and their organisation need to adapt, NOW. How do you do this? For a start getting their forecasting and planning approximately right, not precisely wrong.

I wrote about this in the article ‘How to get it approximately right, not precisely wrong’ published in ICAEW’s Finance & Management, December 2014

In the article I wrote.

We all know that our annual plan will be wrong as soon as the ink is dried.

In the past accountants have tried in vain to budget at even more detailed level to somehow see into the future. It was and is now still a pointless exercise. We need to acknowledge that it will be wrong so let’s get it wrong quicker! Albeit as close as possible to the future actuals.

In planning, many of processes are carried out, year in and year-out, because they were done last year. All the previous ‘givens’ associated with forecasting should be challenged and all the inefficient processes abandoned as Peter Drucker preached.

Just as a house is built on a solid foundation, forecasting financial numbers should be built on best practice ‘foundation stones’.

1. Forecasting at a category level rather than at account code level

Forecasting at a detailed level does not lead to a better prediction of the future. A forecast is rarely right. Looking at detail does not help you see the future better. In fact, I would argue that it screens you from the obvious.

A forecast should concentrate on the key drivers and large numbers rather than a myriad of numbers gathered at account code level. Think about it. Do you need a target or budget at account code level to control costs? If we have good trend analysis captured in a reporting tool we can easily identify costs that are out of control. Therefore, you can apply the 10% rule and dispense with forecasting at account code level unless an account code is over 10% of total expenditure, see Figure 1, below left -:How a forecasting model consolidates account codes.

2. Separating targets and realistic forecasts

Generating realistic forecasts rather than forecasts that the board or senior management wants to achieve is vital. The board might want a 20% growth in net profit, yet management might see that only 10% is achievable with existing products, customers and capacity constraints. If the forecasting team reports what the board wants to hear, they are simply hiding the truth.

Figure 2 shows what happens if the team reports what the board wants. In this example, only in the final quarter does the real situation become clear: a year-end performance below expectations. The annual plan, which was prepared in March for the new year that starts in July, is forced to match the stretch target and subsequent forecasts in June, September and December to keep up this charade. In reality, the truth was always a shortfall, as the dark line in Figure 2 shows.

You can read about the other foundation stones in the article and purchase my Lean 21st Century Finance Team Implementation Guides, which will prepare you and your team for the future.