“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know … that tend to be the difficult ones.”
So said former U.S. Secretary of Defense Donald Rumsfeld—and it’s as good a starting point as any for finance teams looking for a way to approach today’s uncertain times. You can model the impact of any conceivable scenario on your business—the things you know you know and the things you know you don’t know—but you can’t possibly plan for everything. As we’re all learning today, the “unknown unknowns” are indeed the difficult ones.
But the most strategic finance teams embrace the need for agility no matter the market conditions. And the strength of agile forecasting is particularly apparent when faced with those “unknown unknowns.”
Agile forecasting provides a chance to model future scenarios, learn from experience and close the feedback loop by analyzing the variances between your forecasted numbers and latest actuals. By helping to determine what caused those variances, it also sheds light on the course corrections you need to make to stay on plan.
Planning Better—in the Moment and Beyond
When the market changes unexpectedly, finance teams need to adapt quickly, consistently and intelligently. But most companies still see strategic planning and budgeting as an annual process—which makes it difficult to achieve agility, for multiple reasons:
- Annual budgets anchor you to strategic planning goals set months earlier, in many cases outdated by the start of your fiscal year.
- Market conditions, competitors and internal business factors can change dramatically over the course of a year, sometimes from day to day.
- Annual budgets give you a single feedback loop per year, the one chance to course correct and commit for another 12 months.
In contrast, agile forecasting empowers you with a clearer understanding of what to analyze and where to act—while ensuring you have the models and data to make the best decisions possible at any given time. It’s why rolling forecasts, one type of agile forecasting, have long been identified as a finance best practice. While adoption remains far from widespread, research from technology analysts and associations such as Aberdeen, CIMA and the IMA have shown the value of this kind of forecasting in driving or promoting better:
- Finance capabilities: Holistic “what-if” analysis; drilling down from summary numbers to specific investments, campaigns, even individual transactions
- Business planning capabilities: Incorporating business drivers and KPIs in the planning process; identifying profitability at the unit, location, product and employee level
- Overall business performance: Increasing revenue growth by more than 40%; fostering greater cross-departmental collaboration
With agile forecasting, unlike annual budgets, you can look ahead from your current starting point, not months past—examining your business either on a rolling timeframe, a real-time basis or a traditional monthly or quarterly cadence, for a deep line-of-sight that takes into consideration the most current market and business conditions. That means, in periods of uncertainty, agile forecasting can help prepared finance teams adapt quickly to unexpected events and shifts in market conditions.
Putting the Right Process in Place
By exercising a finance muscle other companies simply aren’t using, agile forecasting gives finance teams an advantage—ensuring the best processes and practices are in place to anticipate and adapt to whatever uncertainty arises. With continued reforecasting iterations your finance team and business counterparts will embrace change with:
- Speed: Reforecasting, variance analysis, scenario modeling and other forecasting practices make it easier to react fast with a full set of best practices already in place.
- Transparency: By creating cross-functional trust, transparency empowers finance leaders to adjust and reallocate resources on the fly when times of uncertainty emerge.
- Accuracy: Forecasts will naturally become more accurate with each iteration, as you hone into which drivers matter more than others and which metrics are beyond your control, then include them in your variance analysis process.
Every reforecasting iteration is an opportunity to test against any number of changes in business or market conditions, including (but not limited to):
- Supply chain dependencies
- Interest and exchange rates
- Tariffs and trade agreements
- Liquidity, cash on hand and access to capital
- Customer needs and behavior
- Geopolitical factors
Getting Started with Agile Forecasting
If implementing agile forecasting is a critical step to navigating these uncertain times, how you implement it is just as important. You can’t track everything all the time—identifying your key drivers and KPIs and the metrics you can best control, as well as the data you need to support them, is key, as is understanding how to time your forecasts to get the answers you need. Consider both:
1. How Often Should You Reforecast?
Whether you reforecast on a quarterly, monthly, weekly, daily or real-time basis will depend on how your business operates and the resources you can draw from. While research from KPMG has found that the most common frequency for extending rolling forecasts is quarterly, you should pick what works best for your process.
But it’s easy to shift gears—it’s all about agility, after all. You might choose a rolling forecast on a quarterly basis when times are good, then move to monthly when they’re more uncertain. Or you could opt to run your model on the fly when you experience a dramatic shift in business—the loss of a significant revenue stream, for instance. You may even choose to examine different business processes or KPIs on different schedules.
Finding the right balance is key. Forecasting every process in real time can introduce monitoring and communication challenges, for example. But in uncertain times, specific processes or KPIs—revenue or cash, for instance—can benefit from that moment-by-moment attention. An agile forecasting process will allow you the dexterity to employ real-time forecasting in some cases and time-based forecasting in others—using whichever timeline works best for you.
2. What Are My Key Drivers and What Data Will Support Them?
Key to agile forecasting is ensuring your internal stakeholders—starting with finance—have all the data they need to make quick, educated planning decisions.
That means looking beyond your accounting system and financials to get a holistic view of your entire business—both your key drivers and KPIs and the levers you can pull to adapt to changing conditions on the fly. And from a technology perspective, it means having readily available tools to add to those financial metrics to capture previously siloed data from across your business into a single system, including:
- Non-Financial Data: Including human resources information, sales data from a CRM and any other relevant data sources that influence the overall planning process.
- External Factors: Such as geopolitical risks, exchange rates for international business, economic trends and more.
With the right data, your finance team will spend less time chasing down numbers and more time analyzing, correlating and extracting actionable insights from their forecasts. You’ll be able to use company-wide KPIs to identify new growth opportunities and make quick, difficult decisions when necessary.
Moving Forward—with Agility
Agile forecasting isn’t a process that’s adopted overnight, especially during periods of uncertainty. But it all starts with the right drivers and data, as well as a timeline that will empower you to look ahead, identify trends and adjust accordingly. And with the right processes in place, you can start to identify and address those “unknown unknowns”—long before they take control of your business.
Learn more about how you can quickly get started with best practices for agile forecasting, or talk to an Vena FP&A expert 1:1, with no obligation, to help you plan for today and tomorrow.