Forecasting and advanced analytics

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AMM no tie BWAndrew Mosely, Deputy Managing Director, reports from the most recent meeting of the London FP&A Board

Last week, I participated in the eleventh meeting of the London FP&A Board, the exclusive forum for FP&A professionals from large organisations in the UK and Europe. The topic of the discussion was rolling forecasting, and participants brought a wide range of experience and perspectives to the table. We were joined on the evening by finance leaders from Legal and General, Coats Plc, AP Moeller Maersk, CA Technologies and Cafcass amongst others.

The discussion offered a real insight into the various approaches that different organisations bring to their forecasting process, and the many ways in which the principle of a rolling forecast is adapted to particular circumstances. This ranges from the technology industry, where fast-moving product developments mean that even forecasting one quarter ahead can be challenging, to asset management and capital intensive industries, where horizons stretch to a decade and more.

What was clear from the different opinions around the table, was that selecting the right techniques to create and then utilise the forecast is critical. Forecasting may once have been a fairly standard process across many different industries, but those days are long gone. Effective forecasting is now a highly individualised and strategically significant practice.

From the conversation at the meeting last week, it was clear that businesses are not looking to their forecast to simply provide a set of targets, nor just a rough guide to future performance, but to be a tool that can be used to actively identify and validate the actions necessary to achieve business goals.

This isn’t easy, and the means of achieving it will vary widely between industries and organisations, but the basis is generally some sort of predictive model of the business, which can use either driver-based or statistical modelling. What was clear from the discussion was that the selection of the most relevant drivers is a vital success factor, and that considering too many or irrelevant drivers can introduce an unacceptable level of uncertainty in the forecast.

Balancing this against the level of detail required to drive operational decision-making is another challenge. However, if it is well-managed, then this can take place as part of the process of identifying relevant drivers. If both the predictive model and the appropriate levels of analysis can be captured in the one platform, then together they can afford the insights necessary to directly improve performance.

The approach of FP&A professionals to forecasting is no longer to treat it as a routine, rather tiresome but necessary chore. Despite the wide range of perspectives and experiences in evidence last week, what was clear is that new technology, new techniques and new attitudes have allowed forecasting to become a powerful and flexible tool, and one that helps finance leaders drive positive decision-making throughout the business.

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