At the start of 2020, chief financial officers and their finance teams were going about business as normal, developing forecasts on a yearly or periodic basis. Forecasting has always been a critical workflow for organizations, a strategy to guide growth trajectories and chart progress toward the goals of the enterprise.
But when the pandemic hit around mid-March, those annual forecasts were suddenly rendered all but useless. Sudden economic volatility yielded supply chain disruptions, unexpected business closures, and fluctuations in capital supply, with organizations looking to mitigate risk through a variety of means — many of which were never predicted in those financial forecasts.
According to Prophix CEO Alok Ajmera, it wasn’t just those 2020 forecasts that were abandoned by finance leaders. Indeed, the entire practice of annual or periodic forecasting is now falling by the wayside as CFOs seek more effective ways to navigate pandemic-fueled uncertainty. As he told PYMNTS in a recent interview, new cash flow forecasting strategies that surface today are likely to stick around for the foreseeable future.
A Sudden Change Of Course
For decades, finance teams have been instructed to run forecast and scenario reports on an annual, quarterly, or otherwise periodic basis. Such was the status quo headed into 2020.
“Then, all of a sudden, come March, everything was pretty much thrown out the window,” said Ajmera.
Despite what was undoubtedly a taxing period for many CFOs, something “incredible” emerged out of the disruption.
“What every single CFO was doing around the world was constantly reforecasting — almost on a weekly basis,” added Ajmera.
The intense market disruption, fueled by the global pandemic, didn’t just mean that organizations had to rethink their financial strategies for the weeks, months and years ahead. It also meant that those plans had to adjust to ongoing fluctuations and shifts in the market. Scenario planning now had to include how a company would respond if a certain border shut down, then opened up again; or, if a nationwide lockdown hit part of a firm’s supply chain, for example.
At the heart of CFOs’ revamped forecasting strategies was a focus on agility, noted Ajmera. This also meant taking a more granular approach to the potential scenarios that might play out.
For example, no longer could finance teams develop their cash forecasts based on blanket assumptions about their supply chains, like when they would pay suppliers, or get paid by business partners. Instead, professionals had to consider more minute details about individual contracts and payment terms, the financial health of their supplier base, and how these possible events will affect the bottom line.
Tackling The Data Deluge
The concept of continuous forecasting isn’t new, but until the pandemic hit, Ajmera said it was only a select few organizations that had been able to actually implement the strategy.
One of the biggest barriers to adoption is the overwhelming volume of data that CFOs and their finance teams must handle in order to plan for the future. After all, it’s one thing to handle troves of data to develop a forecast once a year, but it’s an entirely different beast to do so every month.
Though finance teams are well-versed with how to analyze financial data, cash flow forecasting involves taking in more broad, operational information from across the enterprise. Aggregating all of that data across siloed systems, and understanding the best way to harmonize and leverage it, can be “overwhelming,” said Ajmera.
There are three pillars to a successful data strategy, he said.
The first involves the implementation of adequate infrastructure to actually make this data available. The second requires adopting the appropriate tools to analyze that information. And the third — and often the most difficult to achieve, he said — is to ensure that finance teams actually have the right skill sets in place to make use of this data.
“Accounting teams are accountants. They know how to look at financial data,” noted Ajmera. “But we’re talking about a larger set of data, and it’s not all financial data. So it’s about looking at the team, and starting to think about how you can bring the right skills to manage and manipulate this information.”
For many firms, that might include the inclusion of data scientists and data engineers within the finance function, he added.
A More Agile Future
The coronavirus crisis has jolted organizations around the world into a continuous forecasting strategy out of necessity. But once CFOs obtain a clearer picture of the tools they can wield to empower finance professionals to more quickly react to market changes, and proactively anticipate what lies ahead, the benefits of continuous forecasting are likely here to stay.
As such, he said, it’s unlikely that he, or any other business leader for that matter, would ever go back to the old ways of yearly, static forecasting, even in a post-pandemic world.
“What the pandemic has forced is a much more real-time approach,” he said. “You throw your old plan out the window and rebuild a new plan next month. That shift has been driven by the pandemic, but I would imagine it’s going to be hard for organizations to ever stop doing this.”