Effective Financial Planning by Budgeting, Forecasting, & Modeling

Insights can help in effective financial planning by budgeting, forecasting, and financial modeling by using its talented resource to facilitate the CFOs and organization in their internal decision-making process.

Realizing the power of dynamic and predictive forecast:

Many organizations usually conduct quarterly forecasts; however, such practice is being challenged now. Senior executives in organizations are increasingly expecting a forward-looking view of financial information that is updated on monthly basis to adjust projections, incorporate new scenarios, and informed strategic decisions.

Organizations should consider forecasting key line items and underlying drivers every month inclusive of top-line rivers such as revenue growth and operating profit. Upon observation of change in market conditions, the management should be able to identify core drivers and metrics upon which to evaluate the variance of actual to forecast rather than merely executing a long interval detailed plan. Since such practice shall be conducted in a greater frequency, the organization shall be able to revisit the information needs to deliver to steer the business and pave way for informed decision making.

Machine-enabled tools can play a vital role in alleviating the burden of high-frequency forecast practice since forecasting practice has become more mature and organizations now seek for extended forecasts to provide a baseline for annual planning efforts and mitigate lengthy annual planning cycles.

Develop connected, enterprise-wide planning and forecasting capabilities:

An increasing number of organizations are now realizing the potential value of connecting functional planning and forecasting efforts throughout the organization. The value of strategic decision-making delineated by the financial forecasts amplifies only when those forecasts can integrate expectations of future performance across the organization including commercial and operational functions. Historically efforts to align expectations and integrate forecast assumptions and outputs used to be lethargic and error-prone, resulting in outmoded technology and high manual processes. Enterprise-level planning and forecasting tools are designed specifically to facilitate cross-functional integration to eliminate organizational barriers.

Account for the impact of changes to the financial planning process on incentive compensation planning

Execution of the predefined strategies would have implications on the way compensation shall be linked to actual-versus-planned performance analysis, which is a common practice across many organizations. Identifying changes to strategic planning, financial planning, and forecasting processes shall be crucial in terms of being inculcated into planning and executing compensation. Enhancing financial planning and forecasting capabilities by adopting digital competencies, such as a predictive, drive-based mechanism to enable scenario modeling agility, is now more significant than ever. In the contemporary era of uncertainty, identifying and scientifically discussing potential scenarios can assist organizations to prepare for the future. Improvised capabilities will likely be necessary to rapidly digest and assign value to evolving sources of data to incorporate that perspective within planning and forecasting models in an efficient and scalable way. To successfully deliver, finance-oriented organizations should challenge the existing mechanisms by which they are implementing their planning and forecasting processes and developing related scenarios. Targeted efforts using these short- and long-term strategies can bolster planning competencies across times of crisis, recovery, and business, and along with that unleash the value that is uniquely attributable to financial forecasting and its ability to inform and strengthen strategic decisions making.

Building trust in a dynamic and pursuing predictive forecast

Predictive forecasting includes the usage of algorithms and statistical modeling techniques to describe what’s probable to occur in near future, it is quickly transforming from a preferred choice in productivity benchmark to a fundamental financial capability. Now organizations are moving towards a solution that combines data science, machine learning, and advanced visualization to assist companies to boost their forecasting and scenario modeling techniques. Organizations must adopt a human-oriented approach to integrate predictive capabilities into redesigned forecasting processes to ensure that machine-enabled capabilities align with targeted forecast outputs, reduce manual effort, and enable users to translate data science-driven outputs into meaningful transparent insights.

Importance of financial forecasting tools amid the COVID pandemic

In terms of market forces, lockdown and restrictions have led to a massive reduction in the production of goods and services, this has severely affected capital usage and a substantial number of employees. Eventually, the GDP has decreased by 5.3% in 2020, therefore a decrease in the whole production has led to a cut in demand for employees throughout all sectors of the economy. Specifically talking about households that depend solely on income from an employee that comes from a background of lower education, facing a hard economic crisis in the pandemic phase. The sector of oil and gas saw a drop of US$ 22.39 per barrel in March 2020, and subsequently, a fall in global oil prices resulted in a massive decrease in export gains. For instance, Saudi Oil company ARAMCO executed a cut of 25%-36% in its capital expenditure in 2020, it should be kept in mind that the oil industry accounts for almost 77% of the KSA economy which makes it highly vulnerable to economic crisis future. In the context of the aforementioned facts, the startups in KSA would consider a high level of economic risk, however as the economy is on the path of recovery from the post-pandemic effects of COVID 19, the new investor would direly need to redesign the process of strategic decision making for the organization. In the context of using forecasting tools, financial modeling and feasibility studies are to build on the premise that encompasses versatile scenario testing, machine-enabled simulation testing, and concluding appropriate option which inculcates risk element and opportunity to devise ways to tackle the crisis.

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