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October 4, 2024

The High-Stakes Challenge of Getting Forecasting Right

FinQore recently hosted a webinar on Revenue Forecasting, bringing together over 100 financial planning and analysis professionals (FP&A) to explore strategies for enhancing their forecasting practices. However, one crucial topic we didn’t explore was just how high the stakes can be when your forecasts miss the mark—and the ripple effects it can have on your business.

Revenue forecasting plays a pivotal role in shaping business strategy, influencing growth decisions, resource allocation, and performance evaluation. Accurate forecasts enable effective planning, helping businesses seize opportunities and manage risks more effectively.

As Scott Parker, Head of Financial Management at KPMG International, puts it:

'Leading organizations widely acknowledge that forecasting is at the heart of the performance management process and is potentially a significant driver of business value and investor confidence.'

Despite its importance, over the past two years, more than 80% of companies have failed to meet their revenue forecasts (Gong, 2024). Even public companies struggle, with earnings guidance being inaccurate around 70% of the time (SSRN, 2022), showing that this issue affects private and public entities.

Impact of missed-forecasts

Unreliable forecasts can prevent businesses from adequately preparing for unforeseen circumstances and adjusting their strategies effectively. Missed forecasts can cause investors and stakeholders to lose confidence in a business’s ability to adapt to economic fluctuations, changing customer expectations, and competitive pressure. All of this can have an impact on valuations.

Underperforming Forecasted Estimates

When revenue falls short of forecasts, both financial and operational challenges arise, impacting a business in multiple ways:

  • Hard Costs: Missed forecasts can lead to hiring freezes, stalled raises, and ultimately, layoffs. The Gong report highlights some compelling statistics:
    • Hiring Freeze: In the U.S., 42% of businesses reported implementing a hiring freeze due to missed forecasts.
    • Decreased Pay: 40% had to pause planned pay increases and bonuses.
    • Layoffs: 28% indicated they had to let employees go, showing that forecasting gaps are a contributing factor to ongoing layoffs.
  • Soft Costs: Include impact on executive team credibility - especially the CFO and CRO, employee morale, negative brand implications and erosion of overall confidence.

Outperforming Forecasted Estatimes

While exceeding forecasts may seem beneficial, it also comes with challenges and costs:

  • Hard Costs: Missed opportunity to accelerate operating plans, Inefficient "late spend", under-resourced teams to meet demand, and potential customer churn or failed-go-live situations.
  • Soft Costs: Similar to when you under-perform your forecasts, over-performance also leads to impact on executive team credibility, and erosion of confidence.

Accurate Forecasting Needs Accurate Inputs

According to Gartner, only 45% of companies have confidence in their revenue forecasting accuracy. Over 50% feel that poor data quality is a primary contributor to inaccurate forecasts. (Gartner, 2020).

FP&A teams are diligently striving to enhance forecasts with precise data. Consequently, they devote 75% of their time to data collection and process management, leaving only 25% for delivering value-added financial analysis to the business. (AFP Report, 2021).

FP&A teams are dealing with 3 core issues:

Issue # 1: Siloed Data Across Multiple Source Systems:

FP&A teams often struggle with accessing and consolidating data because it is stored in various disconnected systems. This creates a "siloed" effect, where data is fragmented across multiple sources—such as different CRMs, ERPs, data warehouses, spreadsheets and other financial systems. Each department or function might have its own data source, and integrating these sources into a single source of financial truth becomes a complex and time-consuming process.

Issue # 2: Tailoring Data for GAAP vs. Cash vs. Revenue Analysis and Reporting

FP&A teams have to harmonize data uniquely for different reporting needs—cash reporting, revenue reporting, and GAAP RevRec—each requiring specific data transformation. Cash reporting focuses on cash flow, revenue reporting emphasizes performance metrics, and RevRec aligns with GAAP standards for accurate revenue recognition and compliance.

Issue # 3: Data accuracy issues within source systems:

Even when data is accessible, its accuracy is often questionable. Errors can arise from manual data entry, outdated information, historical information changing causing impact on historically reported numbers or inconsistent data formats across systems. This poor data quality undermines forecasting accuracy, as FP&A teams might be working with incomplete, erroneous, or data that has shifted over time.

FinQore: Elevating Revenue Forecasting for Lean Finance Teams

FinQore’s Revenue Cube automation addresses these issues, providing lean finance teams with daily updated, clean, accurately harmonized, and deeply segmented data. This high-quality data can power granular level Revenue analysis and can seamlessly integrate with Excel-based revenue forecasting models, automated revenue forecasting tools, and be used with advanced revenue forecasting techniques like regression, machine learning, and AI models.

By automating data preparation for Revenue analysis, FinQore frees finance teams from repetitive tasks, enabling a focus on modeling and pairing revenue data with external datasets for enriched forecasting.

The Benefits of FinQore:
  • Organized Data: Revenue, customer, and product usage data is organized for easy analysis, eliminating manual data wrangling.
  • Increased Data Accuracy: A tailored semantic layer transforms and harmonizes data, reducing errors and ensuring historical consistency.
  • Efficient Forecast Updates: Automated data outputs allow for daily updates, keeping forecasts relevant and current.
  • Proactive Alerts & Notifications: Data integrity monitoring ensures that historical data does not change in source systems. If changes do take place, real-time alerts notify you instantly, preventing last-minute surprises before forecasting.
  • Reduced Burnout: Automation alleviates the burden of mundane data preparation, improving productivity and job satisfaction.

Take Action for Better, Accurate Forecasts

In conclusion, for FP&A professionals, mastering revenue forecasting is key to transforming it from a source of stress to a strategic advantage. By leveraging both qualitative and quantitative methods, automating data with tools like FinQore, and maintaining a dynamic forecasting process, businesses can thrive even in uncertain times.

To deepen your understanding and enhance forecasting capabilities, consider partnering with experts or exploring advanced tools like FinQore designed specifically to automate manual data processes for FP&A teams. Investing in the right skills and tools can pave the way for strategic wins and sustained business success.

Take your forecasting skills to the next level:

Eva Shah

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