Using a Rolling Forecast to Spot Trends
Posted By Rob Millard - 1 Comments -
The Harvard Business School Working Knowledge blog has a posting that I think is right on the money about what the roles of CFOs in professional service firms should be. For too long, their primary purpose has been to measure and describe the history of the firm's financial performance. According to Jeremy Hope:
"Most CFOs want to spend more time managing the future rather than dwelling on the past. So the ability to help managers to prepare quality forecasts is fast becoming a core competence. But most finance teams have much to learn. The mistake that most of them make is assuming that forecasts are about predicting and controlling future outcomes. The purpose of forecasting is to inform decision making (to help shape future outcomes), not to predict the future."
Strongly recommended reading for your accountant / CFO / financial manager! This is exactly the approach that is needed in order for firms to be able to be strategically resilient and to be able to react to and capitalize upon a range of futures.
To say that many (perhaps most) firms are playing catch-up on this aspect, is an understatement. Besides issuing invoices, chasing debtors and managing creditors, most accounting departments that I have encountered are focused on bookeeping, cash flow forecasts and statutory returns. All essential activities, to be sure, but of limited value to strategists.
Who are your most important clients? How much did you earn from each of them last year? The year before? In 2003? Is this growing or shrinking? What is it likely to be next year and on what do you base this assumption? What are they buying more of? What are they buying less of? Which practice areas have profit margins that are widening? Narrowing? So far as it is possible to discover, how are your competitors faring with these same metrics?
Once one has the answers to these and other similar questions, one can quickly work out which way to point the ship. This goes beyond performance dashboards and real-time management, to what one actually does with the data. With a constantly evolving, rolling short-term business forecast on the "screen," the firm's leaders are in a far better position to make good strategic and management decisions.
In 1989, Gary Hamel and C.K. Prahalad wrote that
"Strategic intent is like running a marathon run in 400 metre sprints. No one knows what the terrain will look like at mile 26, so the role of top management is to focus the organization's attention on the ground to be covered in the next 400 metres."
Without the ability to do accurate, meaningful short term rolling forecasts, it is difficult to see even what the next 400 metres will look like!
Comments, as always, are most welcome. Please post them below.
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i have got an interview about rolling forecast,and i hav been trying to read it on the internet.can you pls enlighten me more.my interview is in half an hour time.
