Financial Planning and Forecasting
Sahilee Sampat Todkar
Forecasting promotes strategic financial planning
Beech, Alfred J (2001) states that,
Market-based demand forecasting uses informed judgment, together with an analysis of historical data and a set of explicit assumptions regarding those data, rather than just educated guesses based on limited information, to describe and compare various potential future demand scenarios. In addition, the data gathered for demand analysis can be used for other purposes, including achieving a better understanding of an organization’s financial risk. Market-based demand forecasting is an essential component of sound strategic financial planning. While simpler approaches (eg, holding volumes constant, applying a constant rate of change) may produce the same results as a market-based approach, they do so largely by chance. In addition, organizations that rely on simpler approaches miss the opportunity to make use of valuable information in assessing the financial risk associated with each demand element. Forecasting utilization rates and market shares involves a great deal of judgment and is as much art as science. Management may not have perfect information or foresight, but using an objective method is a starting point for improved planning and better decision-making.
Finance of forecasting
Clark,Don (2022) states that,
We all know that S&OP requires the involvement of Finance but in many organizations this function can feel detached from the core S&OP functions of demand and supply. Make no mistake, though, the financial context of a company underpins the entire planning process and is key to keeping demand and supply planning aligned with financial constraints, company goals, and strategy. In this article, I invite planning professionals to walk a mile in Finance’s shoes, revealing the priorities and core responsibilities of this function, including how they must represent the voices of management, ownership and, if applicable, the bank, in the S&OP process. I also discuss how Finance can add value to the S&OP process (and the enterprise as whole) by revealing the impacts of planning activities on cash flow, margin, and P&L, and more. The standard S&OP process is a critical collaboration between sales (demand), production (supply) and leadership. However, when you look over the entire organization, key functions are frequently not represented such as Marketing, Finance, and others. While supply and demand are at its functional core, they exist within a greater context that is underpinned by Finance. Having a broader understanding of the financial environment in which S&OP decisions are made is key to an integrated and mature planning process.
Planning with Balance sheet modeling
Eastburn, Stephen (2000) states that,
While finance professionals can certainly understand this, many have still not revised their priorities to support and facilitate a comprehensive and prospective approach. Today, organizations plan the balance sheet and net interest revenue in fragmented ways, if at all. Some organizations do not plan business unit net interest revenue as the result of balance sheet, rate and spread assumptions but rather by plotting the future based on historical net interest revenue trends. Others may actually plan balance sheets, but use simple rules-of-thumb or “back of the envelope” calculations to determine yields, funding rates, and spreads to calculate a business unit’s net interest revenue. Very few have actually included the dynamics of the existing balance sheet’s cash flow and repricing characteristics into the equation. These exercises break down when the parts are consolidated to the total corporation and don’t make sense. While business unit net interest revenue and spread may seem reasonable, the trends of the total corporation’s interest income and expense may not. The Treasury Mismatch (the consolidated net of funds transfer pricing charges and credits) will probably be misstated. In addition to the disconnect between historical performance measurement methodologies and those for planning, oftentimes strategic financial planning, forecasting, and budgeting exercises are based on different approaches and use different support tools. This leads to time-consuming and painful rationalizations and reconciliations among the different planning exercises.
Importance of financial planning for female investors
Palka Arora Chopra (2023) states that,
Volatility is an inherent characteristic of financial markets, and investors are well aware of its constant fluctuations. However, the rapid and overwhelming swings can create market anxiety, particularly impacting retail investors. Financial planning can play a significant role in enabling entrepreneurship, especially for women investors who often face unique financial challenges when starting a business. One of the most significant issues that women encounter is a lack of financial and social assistance; they lack adequate access to finances and credit-lending facilities and are often unaware of the many financing options accessible to them. There is a lack of networking and guidance opportunities in the market. By implementing financial planning strategies such as setting financial goals and aligning them with a budget, leveraging monetary reliefs and managing cash flow properly, women can better manage their finances and increase their chances of attaining monetary stability. A finely executed financial plan also assists in forecasting future expenses and revenues, which can be crucial in making sound business decisions. The Implementation of comprehensive financial planning is imperative for women investors to attain financial autonomy, bolster their fiscal security, and surmount entrepreneurial impediments. Financial planning serves as a catalyst to dismantle barriers, enabling women to flourish as astute entrepreneurs within stringent parameters. However, it is important to note that planning finances is beneficial for every investor, irrespective of gender. The key is to align financial planning with individual circumstances and goals, ensuring a holistic approach to long-term financial well-being.
Financial planning challenge
Manila Bulletin (2022) states that,
In the classic textbook on Corporate Finance by Brealey, Myers and Allen, they introduce the topic of financial planning by saying that a camel looks like a horse created by a committee. “If a firm made all its financial decision piecemeal, it would end up with a financial camel. Therefore, smart financial managers consider the overall effect of financing and investment decisions and ensure that they have the financial strategies in place to support the firm’s plans for future growth.” Planning through forecasts may determine the most likely outcomes. But the astute planner is also concerned with unlikely events by way of contingency. In planning, the decision makers look at external variables with a keen eye. As in weather forecasting, our visibility is easily blocked, narrowed and distorted by external factors. There are both leading and lagging indicators. Business, economic and industry cycles must be analyzed well. One approach is the PESTEL analysis that evaluates the external forces that can impact an industry and gauges the future market potential for the growth or decline of a product or firm. PESTEL considers the political arena, economic factors, societal changes, technological development, the changing environment and the legal milieu. Finally, the process that produces the plan is as important as the plan itself. Planning forces consideration of the interaction of financing, investment, capital structure and working capital decisions of the firm. Planning prepares the organization to reset when unlikely or unanticipated events happen. As one expert said, “if you fail to plan, you are actually planning to fail.” We plan not to avoid risk, but to ensure we are taking calculated risks that will deliver the desired outcomes.
Measuring and managing risks
Kleinmuntz, Don Z ; Kleinmuntz, Catherine E. & more (1999)
Strategic financial risk assessment is a practical technique that can enable healthcare strategic decision makers to perform quantitative analyses of the financial risks associated with a given strategic initiative. The technique comprises 6 steps: List risk factors that might significantly influence the outcomes. Establish best-guess estimates for assumptions regarding how each risk factor will affect its financial outcomes. Identify risk factors that are likely to have the greatest impact. Assign probabilities to assumptions. Determine potential scenarios associated with combined assumptions. Determine the probability-weighted average of the potential scenarios. Although strategic financial risk assessment is like traditional strategic financial planning in that it is based on assumptions regarding uncertainties in the market, the technique has two distinct advantages over the traditional method. First, it forces financial decision makers to systematically consider the range of potential outcomes for every risk factor associated with a potential strategy. Second, and more important, it provides a check against overly optimistic or pessimistic projections of financial outcomes by providing a mathematical means to balance the full range of assumptions.
Improving Methods
Sumy, Azarenkova (2017) states that,
The paper Investigates issues, concerning financial planning at the enterprise. Methods and models of financial forecasting are analyzed and their unification is proposed. The main problems of financial instruments using (such as financial planning) are described. Planning is important element of management, which ensures achievement of strategic priorities. Effective financial planning is essential tool of achieving of the main goals of the enterprise – profit maximization and cost of the enterprise. As market conditions in Ukrainian market of goods and services have its own specificity, which is defined, on the one hand, by means of analysis, formation and allocation of financial resources, and, on the other hand, the sources of reserves increasing, in order to implement the operating and investment activities to ensure their sustainable financial development. It should be noted that the formation of these processes has a significant impact on both objective and subjective factors, such as instability of tax policy and regulatory legislation for national currency, the impact of the global economic crisis, reducing the resources and available current assets etc.
Forecast calls for increased revenue
Needleman (2022) states that,
Better tools for financial planning & analysis help accountants help clients make better decisions Unless you have a working crystal ball, trying to figure what is going to happen in the future is, at best, a guess or estimate. The success of that estimate is dependent both on the amount and applicability of the data you use to project the outcome, and the methodology you use. If the data you use for your forecast is faulty, inaccurate, insufficient, or otherwise flawed, or if the way you use or manipulate that data is likewise inaccurate or inappropriate, the forecast you make is likely to be less than useful and, indeed, can be detrimental when you use it to make decisions that affect your practice or a client’s business. Forecasting is particularly useful in financial planning, as well as other operational aspects of running a business. “Financial planning and analysis software – specifically corporate performance management solutions – are modern, cloud-based tools that enable accountants to quickly and easily average their financial data for routine reporting, audits and filing taxes. Since all of the company’s data (across departments) is automatically updated in the CPM solution on a regular basis, accountants can focus their attention on the data analysis and insights that are most important to their role.
Machine learning for planning and forecasting
Wasserbacher, H., & Spindler, M. (2021) states that,
This article is an introduction to machine learning for financial forecasting, planning and analysis (FP&A). Machine learning appears well suited to support FP&A with the highly automated extraction of information from large amounts of data. However, because most traditional machine learning techniques focus on forecasting (prediction), we discuss the particular care that must be taken to avoid the pitfalls of using them for planning and resource allocation (causal inference). While the naïve application of machine learning usually fails in this context, the recently developed double machine learning framework can address causal questions of interest. We review the current literature on machine learning in FP&A and illustrate in a simulation study how machine learning can be used for both forecasting and planning. We also investigate how forecasting and planning improve as the number of data points increases.
Evaluating the Reserve Bank’s Forecasting Performance
Bohm, Thomas; Sing, Marea (2022) states that,
“The RBNZ uses economic models to pull together and interpret the wide range of data and economic concepts. These models can help predict, simplify, and explain the way the economy works, and the likely impact of monetary policy decisions. They are also used to generate counterfactuals and alternative scenarios for predicting possible outcomes in an uncertain world.” (Reserve Bank of New Zealand, Monetary Policy Handbook (2020)).Monetary policy tools, like the Official Cash Rate (OCR), Impact consumers price Index (CPI) Inflation and employment by influencing aggregate demand. The transmission from monetary policy to aggregate demand takes time, and therefore monetary policy needs to be forward-looking in its operation. However, as described by McDermott (2017), “[forecasting is not supposed to be prophecy; rather, it is about being precise about our thinking”. To achieve this, the Reserve Bank of New Zealand (Reserve Bank) follows a structured forecast process. The Reserve Bank will continue to review its forecasting performance in order to ensure that it is accurately capturing important economic relationships and events in the New Zealand economy. It will also continue to develop new models to assist in maintaining and improving forecasting performance, particularly during periods of heightened economic volatility and uncertainty. The Reserve Bank’s forecasts show the path that monetary policy should take – conditional on the economic outlook and the current understanding of economic relationships – in order to meet the Monetary Policy Committee’s (MPC’s) dual inflation and employment objectives.
Conclusion
Market based demand forecasting is a method of estimating future demand for healthcare organization’s services by using wide data within the services area. Planners can make a explicit assumptions about future regarding data. The S&OP process should be just the start of a journey towards a deeper and more combine planning process that each aspect of the business as well as expands beyond the traditional functional areas to join and consider the broader implications. The purpose of a balance sheet is to describe the resources that a business has and how those resources were acquired. This purpose is seen as an end result of financial planning but this purpose can be seen as a starting point of financial planning. As a starting point of financial planning people should think about how to accumulate wealth from the resources they want to have and how those resources are to be acquired. Women investors often prioritize capital preservation and risk avoidance, resulting in a need for well-crafted financial planning strategies tailored to their specific needs. Planning forces consideration of the interaction of financing, investment, capital structure and working capital decisions of the firm. Planning prepares the organization to reset when unlikely or unanticipated events happen. One benefit of healthcare strategic decision makers from strategic financial risk assessment is capacity to perform quantitative analyses of the financial risks associated with a given strategic initiative. Among the steps involved in this practical technique are listing of risk factors that may have significant influence on the outcomes, identifying risk factors that are likely to have the greatest impact and determining the probability-weighted average of the potential scenarios. The forecast uses data from present and past sales to make an educated prediction of future revenue. Digitalization, especially when it couples large amounts of data with appropriate tools for analysis, represents an important opportunity for the financial planning and analysis function.
References
Beech, A. J. (2001). Market-based demand forecasting promotes informed strategic financial planning. Healthcare Financial Management, 55(11), 46-54, 56.
Bohm, T., & Sing, M. (2022). Evaluating the reserve bank’s forecasting performance. Reserve Bank of New Zealand Bulletin, 85(4), 1-33,I.
Clark, D. (2022). The finance of forecasting (S&OP is only ‘ the start). The Journal of Business Forecasting, 41(3), 4-7.
Eastburn, S. (2000). Better financial planning with balance sheet modelling: [1]. The Journal of Bank Cost & Management Accounting, 13(2), 20-27.
Kleinmuntz, D. N., Kleinmuntz, C. E. and more (1999). Measuring and managing risk improves strategic financial planning. Healthcare Financial Management, 53(6), 50-8.
Manila Bulletin (2022),Financial planning challenge. (2022, May 19)
Needleman, T. (2022). The forecast calls for increased revenue. Accounting Today, 36(10), 26-28.
Palka, A. C. (2023, May 26). Importance of financial planning for female investors [stock in news]. The Economic Times
Sumy, Azarenkova, Galyna; Pasko, Tetyana & more (2017), Financial planning and improving of its methods, Accounting and Financial Control; Vol. 1, Iss. 1, (2017): 39-47.
Wasserbacher, H., & Spindler, M. (2021). Machine learning for financial forecasting, planning and analysis: Recent developments and pitfalls. Ithaca: Cornell University Library, arXiv.org.