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Advice and Information for Finance Professionals

How to get your corporate forecasts back on track

Guest Author

By Scott Costello, Principal Partner, ProCore

With 2021 upon us and COVID-19 vaccinations making their way around the world, there is hope. We’re starting to see new opportunities develop. Some markets are already back to their pre-COVID strength, while others are slowly getting there. The hard part now is predicting what will the future hold.

As organizations look at their 2021 forecasts, using traditional run rates and historical averages does not make sense. The dip from 2020 often skews every chart and throws off any historical prediction tool’s data. The figure below shows where many organizations were predicting their business for 2021. When the impact from COVID hit in March 2020, most businesses saw a significant dip in earnings—making their previous predictions irrelevant.

When accounting for COVID in the numbers with a three-year historical trend, the long-term prediction can show a very flat or limited growth forecast. However, when a rolling 12-month historical trend is used as a short-term prediction, the forecast could produce a negative growth.

Neither of the predictions above is accurate, from what we are seeing post-COVID. Growth rates are beginning to normalize at a deliberate pace. So how should organizations forecast the business given these recent trends? Here are a few approaches to consider.

Shorter prediction time frames

Historically, run rates and prediction methodologies have used anywhere from 2-5 years of data to determine growth rates and forecasts. Predictions are usually more accurate when there is good history to predict from. Most methods can account for and normalize any slight variations or anomalies in the business. COVID’s impact was much bigger than expected, in some cases cutting projections in half of what was anticipated.

To resolve this drastic dip, consider resetting the starting point of growth. Instead of any multi-year model, consider a short-term model that looks at the last 6 to 9 months of activity. Start at a point where the business begins to normalize again to avoid any hypergrowth coming out of COVID’s first impact.

Below are examples using Oracle’s predictive planning tools, where planners can alter the time range of the historical periods to find the right starting point to reset the business.

These flexible tools also allow changes to the growth rates and updates to additional anomalies. The screen shot below also shows how easily you can move the growth rates visually before seeing the economic impact on your business.

Reconcile COVID data

Most machine learning technology anticipates slight variations of data and will try to smooth that over. Unfortunately, the impact from COVID is more than a slight variation. Another option to reconcile the inaccurate curves yielded from this is to completely ignore them. Consider removing 2020 from the 2-5 year trend altogether. For margin data, it’s important to find the new starting point before year-over-year growth is applied. Let’s assume a business saw consistent 5% growth YoY with the exception of 2020.

If a new starting point is applied to the beginning of 2021, it’s reasonable to assume a similar growth rate. If a business has highly seasonal data for revenue, costs and expenses, then applying the same seasonal factors from previous years (excluding 2020) is probably as reasonable prediction as any. It’s important to remember that every industry and every business is different, so there will always be exceptions to the rules; perhaps certain accounts that are still being impacted by COVID should be treated differently. Things like travel expenses and company meeting expenses should no longer use any historical trends for the near future.

Zero-based budgeting

For most businesses, revenue and cost accounts are cyclical, so using some seasonal or growth rate methodology makes a lot of sense. However, expenses are a different story. For many overhead and on-going expenses, it was very common to assume a run rate with moderate increases. With many offices sitting empty and at home expenses increasing, traditional run rates no longer apply. This is the perfect time to revisit all expenses and ask teams to build their budgets and forecast from the bottom up. Start with a clean slate and plan for every dollar. It is a great leading practice for every organization to consider a zero-based plan from time to time to apply scrutiny over ongoing expenses.

With some simple resets, financial plans can get back on track in 2021. Using the options above, businesses can start reusing traditional methodologies for forecasting. As always, it is a good practice to have a few different versions of the forecast—to be proactive instead of reactive, and be ready for multiple economic outcomes. While no forecast is perfect, do not let the history of COVID define your future.

Learn more about planning in Oracle Fusion Cloud EPM.

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