Part 10 in the “Continuous Accounting Action Plan” series
If you’re in financial planning and analysis (FP&A), then you’ve likely been on the continuous finance and accounting journey for a while—by moving to rolling forecasts. Rolling forecasts and continuous planning vary in the level of maturity at many organizations, from focusing mainly on the revenue side of the equation to forecasting expenses. More broadly, it can extend to full-fledged integrated continuous planning, which incorporates both financial and operational facets of the business.
You’re not performing rolling forecasting today or looking to expand to continuous planning? The short response to that: Now is the time to get started―and you’ll see increased pressure to do so soon.
Let it roll — continuous rolling forecasts replace static plans
In a digital world, a forecast is constrained in its accuracy when it’s based on old data and old drivers. The operating environment, customer, supplier, and competitive landscape is often changing quickly. Unadjusted forecasts that are more than a few months old are often misaligned with business reality—and forecast accuracy takes a hit. Rolling forecasts or driver-based forecasts are more agile. It’s one of the reasons that a recent APQC report found that about half of organizations are already using rolling forecasts. About two-thirds of them indicated that the biggest benefit was better overall business alignment—or more simply, the forecasts were more accurate. And because they’re continually updated, it means forecasts can be more comfortably projected a little further out.
Implementing a continuous FP&A process
The benefits are clear, but what does the process look like? There are a couple of things to think about here. First, most rolling forecasts are driver-based. This means that FP&A―and potentially other operational planning teams (sales ops, for example)–have identified the key drivers of the forecast, and update them frequently to reflect the best representation of the current environment.
In many cases, rolling forecasts are integrated—for example, linking the bookings forecast from sales with the overall financial forecast. The timelier the data to drive the planning and forecasting model, the more accurate the drivers. For example, with a sales forecast, the sooner the sales opportunity and closed-bookings data flows into the model, it can better inform drivers such as “conversion rate” across different sales territories. In a financial forecast, the sooner expense data flows from the ERP application, the better it can inform the expense forecast drivers around the increase or decline in AP invoices―essential for budgeting.
Put simply, without this kind of integrated flow of sales and expense data into the model, it’s hard to shift to full-fledged continuous planning. Without a frequent flow of data, either the continuous process will stall because it’s simply too much effort to feed the model, or the rolling model itself will be constructed based on out-of-date drivers, which will impact accuracy. Either way, it’s a fail.
Connecting the dots between accounting and FP&A
That’s why a continuous approach makes sense to extend across both the finance and accounting teams. On the continuous accounting side of the house, accounting can essentially become a better data-enabler for FP&A in two ways. Most obviously, it will shorten the financial close―to release the financials to FP&A sooner for management reporting and modeling. But also, when common accounting tasks like reconciliations are applied in real time rather than the end of the period, accounting has a better picture of financial results before the books close: the “soft close.” And this means that they have a better data set at any point in the period that’s available to feed downstream forecasting models. This can be especially valuable during off-cycle forecasting.
Steps to consider for FP&A
For most of this series, we’ve been focused on accounting. Yet the truth is that a move to continuous for accounting has big benefits for FP&A as they update their own processes. It’s why both initiatives dovetail together.
If you’re in FP&A and thinking of expanding or formalizing your rolling forecasting process, then you need to make sure that it can scale effectively. Your model will need to be refreshed more frequently, putting pressure on data extracts and quality. And you’ll eventually have more data sources (ERP, CRM, HCM, and so on) as it grows to be an integrated forecast.
Accounting is a perfect team for FP&A to partner with to upgrade forecasting models with better financial data. Because accounting organizations are already implementing continuous approaches, they are already achieving more timely data during the period, and faster availability at the end of the period. FP&A should reexamine existing data processes (timeliness and frequency) that are driving planning models, and determine whether they can be redesigned now that accounting is operating more continuously.
In our next post, we’ll focus on how you can use analytics to improve the accounting process. Ultimately, a continuous process requires ongoing improvement—identifying bottlenecks in the close, or in the planning process, and making incremental changes to keep driving quality, efficiencies, and effectively balancing the workload.