Financial forecasting brings real value for advisory clients, but only if done in a way that is timely and directly relates to the business’s main drivers.
In today’s world, we have access to data at incredible speeds. Working together with your clients, you can take full advantage of this information by making decisions quickly before small blips become massive problems.
Without taking advantage of timely and relevant data, you won’t be able to provide the full value that FP&A advisory services can provide for clients. This makes clients less prepared for unexpected risks and potentially leaves money and growth opportunities on the table.
Plus, having standardized data reporting provides a general sense of financial well-being for clients and their teams. But beyond choosing a software tool to support this process, how can advisors provide higher value to their clients with active financial forecasting?
Advisors must become comfortable with a number of concepts to drive value for their clients.
Get Comfortable with Variance
There’s no perfect forecast, and that’s something advisors and their clients need to feel comfortable within the financial forecasting process.
So long as variances can be explained, companies can rest easy that their forecasts are relevant and able to drive value. Review the major differences and ask your clients questions if you’re unable to find explanations.
Help your clients understand the differences, and what can be learned which will have positive impacts on their business.
Over time, you’ll be able to improve your model, gaining more reliable and consistent results to further drive business strategies.
Of course, no one can ever predict trends fully. Be prepared to advise your clients during times of economic uncertainty using data to model multiple scenarios, quickly.
Understand Key Drivers
Drivers are the factors that most impact a business’s outcomes and decision-making. They vary for each industry and company, for example, the following may be drivers in different businesses:
- Manufacturing: a business that manufactures goods would want to understand how their cost of goods and pricing impacts their gross profit and optimal sales number.
- Service providers: might consider customer retention a major driver.
- Hospitality: guest satisfaction and occupancy rates can drive business success.
- Retail: Inventory turnover ratio, which measures how quickly inventory is sold and replaced within a specific period. Understanding this metric helps in optimizing inventory levels, reducing carrying costs, and maximizing profits.
Real-world numbers compared to your financial forecasts will be able to test assumptions held about those drivers.
Business trends change quickly, turning consumer behavior in the blink of an eye. Relying on traditional forecasting methods can safely predict future trends will not always work in your client’s favor.
Regular Review of Drivers and Assumptions
Every month, revisit your forecast:
1) Try to find the correlation between different revenues, expenses, and operational data.
2) Check whether what you assumed drives the business had the expected effect. If not, what was that driving factor?
3) Don’t forget to look at external factors that could throw your projections off. Check with your client and try to dig for information that’s outside of the financial reporting that may have impacted the results.
Make Data-Driven Connections
Understanding relationships between different metrics is key to providing insightful financial advice. While correlation doesn't always imply causation, it's still essential to consider how changes in one area can impact various aspects of a business's operations.
Follow this process to uncover connections that drive value in your financial forecasting:
- Start by analyzing straightforward connections, such as the correlation between marketing expenditure and revenue generation.
- As you delve deeper into connecting different metrics, prioritize timeliness in your analysis. By identifying trends and correlations early on, you can provide proactive insights into the future trajectory of the business.
- Transform these insights into actionable recommendations by highlighting past successes associated with similar trends. Linking financial data to tangible, real-world outcomes adds confidence to your client's decision-making process.
For instance, you could help a client predict upcoming staffing needs based on sales and production trends. By observing an upward trend in these metrics, you can advise your client to consider hiring before staffing shortages become a pressing issue. This might allow them ample time for hiring and training, finding the best candidates, and preparing them for success, instead of frantically hiring at the last minute.
Deepen Your Analysis
Your next role is evaluating the outcomes of decisions made by the business. Now, it's essential to assess whether these decisions brought the intended results.
- Collaborate with your clients to analyze the data and assess the effectiveness of their decisions. Establish measurable, expected outcomes to track progress accurately and evaluate the success of the decision-making process.
- If the outcomes deviate from expectations, delve into the reasons behind the variance. Use this insight to refine your models and projections, demonstrating a commitment to continuous improvement.
- Emphasize the importance of iteration and regular review. Timely identification of disruptions allows for prompt adjustments, minimizing potential financial impacts and ensuring the accuracy and reliability of your financial models over time.
Ditch the Spreadsheets for Financial Forecasting
Jirav is your go-to solution for creating relevant, timely forecasts for your clients. Designed with you in mind, you’ll never want to go back to spreadsheets or clunky software that doesn’t meet your needs. Get in touch for a free demo today!