In today’s whirlwind of a global economy, trying to predict the financial future feels a bit like trying to read tea leaves. The aim is to foresee future cash flow, expenses, and economic trends so you can make sound business decisions, but with the world changing at a lightning-fast pace, forecasting has become a rollercoaster ride.
With that being said, by learning more about the hurdles of financial forecasting and applying some established best practices, you can shed light on the future and propel your business forward.
4 Challenges of Financial Forecasting in Uncertain Times
The four key challenges you will encounter while engaging in financial forecasting in these uncertain times include the following:
1. Economic Shifts
The financial world isn’t playing by its old rules anymore, and things aren’t moving in linear, predictable ebbs and flows. Instead, a tiny shift in oil prices or a sudden policy change can make last month’s financial forecast about as accurate as a newspaper horoscope.
2. Geopolitical Tensions
Trade wars, surprise alliances, and political breakdowns: Together, they sound like the plot of the latest blockbuster thriller, but such is the reality of the current global stage. These curveballs can have a ripple effect on trade, currencies, market sentiments, and your company’s bottom line. Without notice, those trade partners you have relied upon for years may no longer be as reliable as they once were, due to no fault of their own, or worse, you may face trade restrictions or new taxes that crush your margins.
3. Technological Disruptions
Tech breakthroughs like artificial intelligence (AI) and the blockchain are disrupting industries around the world. They’re revolutionizing how we live, shop, and do business, but more importantly, they’re evolving faster than your forecasts, leaving you wondering why your seemingly foolproof predictions are so far off the mark.
4. Environmental and Health Crises
The pandemic acted as a massive wake-up call about how health issues can turn the economy on its head, and with climate change thrown into the mix, you are left staring down potential challenges affecting everything from crop production to real estate prices. The bottom line is that “stable” goods and markets are no longer a thing, so you have to stay nimble.
Adapting Forecasting Models for Greater Accuracy
As there are so many factors at play here, you cannot simply apply a quick fix to shore up your forecasting models. Instead, you need to use a few best practices, such as those outlined below.
Embrace Scenario Planning
Traditional forecasting explores the “most probable” future, but a single unexpected economic, environmental, or geopolitical change could derail your entire model and make it effectively useless. That’s why you need to move away from standard forecasting models and make the switch to scenario planning.
Scenario planning explores multiple outcomes, including a baseline option, as well as each of the good, bad, and ugly possibilities that might come to be. While you want to hope for the best, you need to be prepared for a worst-case scenario, and that’s where scenario planning comes into play.
Leverage Advanced Analytics and Machine Learning
Modern technologies offer robust functionality and tools that can analyze vast datasets quickly. Manually sorting through your entire database is impractical, but machine learning (ML) tech can efficiently run through huge datasets and pull out usable intelligence, all while spotting patterns your team will likely miss.
You are already gathering loads of data, so adopting the latest analytics tools means you will finally be able to put it to use. ML and AI will also save your staff a lot of time, freeing them up to work on more dynamic tasks.
Regularly Update Forecasts
Annual forecasting is a staple of old-school financial planning, but as a forward-thinking financial professional, you shouldn’t want to settle for months-old data. You need insights that evolve with the pace of change in the world. Even quarterly insights won’t cut it in the current environment: To stay competitive, you need monthly forecasts.
Strengthen Collaborative Efforts
Don’t make forecasting a solo endeavor. Bring in insights from your sales, marketing, and other teams. The more layers included in the forecast, the better the insights, but don’t stop there. Get the heads of other departments involved as well and see what valuable feedback they can provide.
Integrate External Data Sources
Besides your company’s data, you need to look at the world out there and consider data sources like global news, industry benchmarks, and even trending posts on social media. Your company does not run without external support, which means your data analytics processes shouldn’t either.
Cultivate a Culture of Flexibility
No prediction is set in stone, so create a culture where plans can be changed if real-world events throw off your forecast, and make sure that your team feels comfortable sharing feedback. If something is going wrong, encourage them to let you know.
Practically Applying a Data-Driven Approach to Forecasting
Forecasting in our unpredictable world might seem daunting, but by mixing traditional forecasting wisdom with new-age tools and a dash of flexibility, you can ride the waves and thrive, no matter what the future holds.
Additional Forecasting Resources