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SWTCH by Pigment
Three days of predictions, insights, and advice from leaders in finance, sales, HR, supply chain and more
Register now here
By Richard Reinderhoff, CFO/FP&A Expert and Independent Adviser
Sometimes, what you forecast needs to change dramatically, due to e.g. market disruption or internal changes. You also might not monitor every business the same way, because each might be in different development stage or ´situation´. By looking at the company itself, but also possible (management) crises, you can determine what the focus of the forecast should be.
A breakpoint is a point of discontinuity, change, or where things simply stop working. Below are three situations which can ‘make or break’ the forecast.
Investing in only forecasting the top-line of the P&L is flawed from the beginning. It will always be a partial view of reality.
What are you forecasting? There is always a priority when forecasting: Competition (Sales or Assets), Costs (Opex or Capex), or Cash (OP or FCF). Continuously forecasting both P&L and Balance sheet seems valid, and it provides basic input for risk management.
The financial results depend on the decisions and actions taken by management. They are in ‘control’. Many symptoms are part of daily business, which could identify (future) problems with management.
What are you forecasting? Here forecasting is about the going concern, without ‘looking’ at the numbers. As a risk it might be called “PR risk” or “succession problem”; that is when someone stops assuming things are in working order.
For lack of a better definition, ‘portfolio complexity’ refers to independent ‘systems’ influencing each other, e.g.:
Add, circular economy, PPP investments, or today’s corporations, and forecasting works only if it is a joint activity.
What are you forecasting? Nothing. In hindsight, this is about planning the future. Here it is about timing, or provisions, contingencies, and restructuring reserves, and how to plan for it.
These three situations can ‘make or break’ any forecast. It is normal for risk management to be involved and partner with FP&A. Risk management as an overview (the short version) shows: (a) risks & opportunities, (b) level of importance (high, medium, low), and (c) the financial impact. Having one for the running year, and one for the long-range forecast (LRF), is or should be normal business practice bringing balance in any presented forecast.
The article was first published in Unit 4 Prevero Blog
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