Mid-year re-forecasting

Companies that use FP&A Plus for their annual budgeting often discover how easy it is to extend a budgeting model in order to use it for preparing regular mid-year forecasts. Forecasting is sometimes used to describe complex statistical processes (for example, preparing sales forecasts based on large amounts of historical data and using processes such as ANOVA or Winters). In FP&A Plus, however, the term forecasting refers to a company plan prepared outside of the regular budgeting cycle.

Mid-year forecasts can be prepared on a regular basis (weekly, quarterly, monthly) or as the need arises.

One reason to create new forecasts is when something changes in the business environment. Changes can be external (for example, related to the overall economy or when competitors change their strategy) or internal (for example, acquisitions, disposals, or changes in strategy). Whenever there are major changes to a business it makes sense to prepare a new forecast. This can be done easily.

Another reason to create new forecasts is when aspects of the business cannot be planned easily for a entire year at one time. In today's business environment, annual planning is becoming much more difficult than previously and many companies create forecasts regularly. This is especially true in highly dynamic industries where business conditions change rapidly.

When preparing mid-year re-forecasts, one issue that arises is the time frame of the forecast. Options available include the following:

  • Forecasting for the balance of the financial year

    In most organizations, reporting for the financial year (or quarterly within the financial year) is most important in terms of visibility and accountability. In such environments, forecasting how the financial year will turn out is very important. This is especially true in organizations where it is expected that costs must not exceed budgeted costs and even more so when it is difficult to accurately predict the seasonal allocation of such costs.

  • Rolling Forecasts

    Either monthly or quarterly, a full year forecast is made, planning 12 months ahead. Preparing rolling forecasts is a very good use of the built-in planning and forecasting functionality, as monthly rolling forecasts are difficult or impossible to accomplish using spreadsheets. However, one of the problems with this approach is that contributors are constantly being asked to plan for an extra month one year into the future, which can place extra burdens on operational management and can be difficult to achieve effectively. This method can demand a lot of support from senior management to implement successfully, and may require a change in organizational culture.

  • Concertina Forecasts

    This is a compromise between the other two approaches. At the start of the financial year, on a monthly basis, the balance of the financial year is forecast, very often by finance staff making assumptions (for example: the Marketing department will keep to the annual budget). At a point during the year, with the help of operational management, the forecast end point is extended, for three, six, or 12 months. For example, a company may plan for the balance of its (calendar) financial year every month until June, when departments are asked to submit a plan for an extra six months until June of the following year. Later, when the annual budgeting process takes place, half the following year has already been planned and merely needs to be updated.

 Use Case:  Forecasting to meet the original budget.