Companies that move quickly or experience transformative events – be it through acquisitions, new product launches, or emerging revenue streams – face a common challenge: budgets and forecasts can become obsolete almost as soon as they’re finalized. However, that doesn’t negate the value of budgeting and forecasting exercises. In fact, it’s the key to successfully managing in a state of “recurring transformation” where change is the norm.
Through ongoing dialogue with the CFO community, we’ve gained valuable insights into how finance leaders are tackling this challenge head-on. Let’s dive into some key strategies and perspectives:
Community Insights: Managing Through the Chaos
We recently connected with a CFO from a leading healthcare solutions provider who shared her journey amidst substantial organic growth and a series of company mergers. These significant changes had the potential to cause upheaval, but with the right strategies, she managed to keep the company on track. Here are several key tactics she implemented:
- Establishing an Anchor Financial Target: Rallying around a clear financial anchor (i.e. annual EBITDA goals). This serves as a crucial reference point for expense management amidst fluctuating revenue levels and shifts in business mix.
- Moving Faster with Tech-Enablement: Leverage automation and real-time data analysis to accelerate budgeting and forecasting processes. This tech-forward approach enables finance teams to respond swiftly to rapid transformation by being able to produce reforecasts more quickly as new information is known or binary events occur (or don’t).
- Linking the Forecast to Decision-Making Processes: Tying forecasts to specific actions (“as long as X happens, we can proceed with Y”). This approach keeps your company responsive and drives key decisions in a dynamic environment.
The CFO also emphasized the importance of investing in finance stating that, “What I’ve found is that prioritizing investments in other functions ahead of finance can be a long-term disservice to the business. We as CFOs should not be shy about investing in our own functions to better enable the rest of the organization.” Prioritizing finance investments can empower the entire organization, giving finance leaders the tools to respond to changing circumstances. In other words, don’t cut corners on investing in your finance department because it seems selfish; invest in your own function as the stepping stone to further enabling others!
FWF Applications: Strategies for Navigating “Known Unknowns”
The true value of forecasting lies in how versions are constructed and utilized, not achieving a perfect single output. It’s about building a flexible framework that allows finance teams to adapt as new information emerges. Let’s delve into some strategies that have proven successful for our partner companies:
- Adopting a Rolling Forecast: Make forecasting a habit. Regularly update your projections with the latest actuals and assumptions to keep them relevant and actionable.
- Conducting Scenario Planning: Establish guardrails to guide decision-making by developing multiple forecast scenarios. This approach allows you to quantify potential upsides and downsides, while also tailoring forecasts for different audiences and purposes (e.g., base case + stretch goals).
- Getting “Tag Happy:” When building multiple forecasts, the more you can link items to binary assumptions and make them “toggle-able,” the more flexible and dynamic your forecast becomes.
A prime example of the power of tagging comes from our PE-backed behavioral health client who had to incorporate organic site growth, new site developments, and several acquisitions into their forecasting. Timing for site openings, ramp-up pace, and acquisitions were unpredictable, leading to significant noise in the actual vs. forecast comparisons. To address the uncertainty, our team incorporated extensive “tagging” so revenue and expense assumptions could be allocated to specific categories (e.g., new site development, acquired site) and associated with binary events (e.g., an acquisition that is no longer happening). This approach allowed for easier attribution of actual results to forecasted performance and enabled quick scenario building to test cash flow, working capital, line of credit needs, and overall EBITDA impact.
Takeaways
The real value of budgeting and forecasting lies in the process, not just the output. The journey of developing these financial tools is just as important as the results themselves. This iterative process enables teams to continuously refine and adapt their strategies in response to evolving data and insights. By embracing this dynamic approach and incorporating financial anchors, aligning forecasts with decision-making processes, and adopting flexible methodologies such as rolling forecasts and scenario planning, companies can effectively navigate the turbulence of recurring transformation.
Interested in learning more about budgeting and forecasting best practices?
View our Budgeting and Forecasting Readiness Playbook here.
Explore our blog on Constraint-Based Budgeting here.
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First Water Finance (FWF) is a finance solutions platform supporting finance leaders, business owners, and capital partners through FP&A, Corporate Finance, and Community. FWF has supported over 100 management teams and sponsors, concentrated in emerging and mid-market enterprises, professionalizing and accelerating the finance function in pursuit of growth, acquisition, and/or sale objectives.