The cost of forecasting errors when managing B2B deals
One of the single most important processes at any B2B company is forecasting, but for it to work you need accuracy, control and efficiency. An AccountingWEB survey in 2005 revealed that planning and forecasting are the processes that cause the most frustration (21%) but we know it doesn’t have to be that way. Most businesses need to evaluate their manual processes and put a better financial forecasting process in place for the future so they can avoid any forecasting errors. We’re here to show you how.
What is forecasting in business?
Forecasting is commonly defined as “the process of making predictions of the future based on past and present data and most commonly by analysis of trends”, it is about being able to account correctly for earnings throughout the year. Various companies use different methods of forecasting, an informal forecasting process – such as when an individual, estimates the future using their experience or gut instinct, or a more formal process using financial tools such as Excel / other systems, based on data from previous years meaning you have more evidence. Either way, these financial figures may be published, or used by other parts of the business for guidance and planning. As a result, the consequence of forecasting errors can be costly.
Why is forecasting important?
Forecasting is essential for preparing for the ups and downs of the year ahead, it is ultimately trying to predict what to happen in the future. This is important because it guides businesses to what actions they are going to take. This can be how much of a product they’re going to buy or keep in stock or what their profit statements are going to say for a certain financial period. Predicting earnings and the resulting profits accordingly depends on having a good financial forecast. In rebate management, reporting on expected earnings – particularly when deals are based on spend target bands – is a tricky business. This is partly due to the inherent complexity of most business to business (B2B) deals and partly due to the complexity involved in creating financial forecasting models. Just small mistakes can lead to massive forecasting errors, which could potentially put your rebate calculations in jeopardy.
Challenges of forecasting for rebate
There are many challenges businesses face when developing forecasts and they can lose a lot of precious time in the forecasting process. The rise in forecasting errors becomes even more strenuous when there is a lack of common tools and inconsistent approaches. Common forecasting challenges include:
- Many in-house forecasting tools are too basic.
- Renegotiating the best rebate deals in the future.
- The forecasting process is too manual.
- Forecasts are not updated throughout the deal.
Types of forecasting errors
- Forecasts are out of date - Your forecasts aren't taking into account the most recent data and understanding.
- Oversimplified projections - Your forecasts are failing to account for all of the data and knowledge you have, e.g. predicting straight lines for future purchasing of seasonal products.
- Overdependence on small data volumes - There will be times where you need to forecast but have little or no relevant historic data. In these cases, it is important to be able to account for any knowledge and expertise that can guide a forecast.
How using spreadsheets causes forecasting errors and more
The financial forecasting process for B2B deals has often been handled using an Excel spreadsheet. In a 2017 FSN survey, 70 per cent of businesses still rely heavily on spreadsheets as the primary method for forecasting. Only 16% have dedicated on-premise software to handle the planning, budgeting and forecasting. The number of organisations that use cloud-based solutions is merely 10%.While there is nothing inherently wrong with using spreadsheets for forecasting, think of the complexity involved in spreadsheets used to manage rebates. Over time, they lose their edge. They become cumbersome and difficult to use. And, if you don’t have the knack of handling them properly – or the person who knows how to use the tool best can no longer manage it properly – they can actually be dangerous for rebate accounting: spreadsheets have actually cost organizations billions of dollars in fines. Various studies also report that nearly 9 out of 10 spreadsheets (88%) contain errors because using spreadsheets for forecasting is a very manual process. You could potentially key in the wrong numbers or copy over the wrong amounts, especially when you want to aggregate the spreadsheet so an overall financial forecast can be produced. In addition to this, the risk of forecasting errors are likely to increase further once you’ve identified that your spreadsheet is corrupted. Forecast numbers constantly change, making spreadsheets quickly out of date, and leading to arguments over the data. Strategic decisions are often made based on what you disclose in these spreadsheets, and any forecasting error could result in stakeholders losing trust with your finance team.
Consequences of forecasting errors
If financial forecasting can be dangerous when used inappropriately, what happens to rebates and what are the consequences for organizations? In the case of rebate earnings, for example, the first consequence of forecasting errors is a lack of trust: people will stop using them internally, meaning that everyone returns to flying blind. Forecasting errors can also result in cash flow challenges. In more serious instances when rebates are not accurately forecasted the auditors can get involved. They can ask to see the justifications and logic underlying those financial forecasts – which are often themselves hidden in indecipherable spreadsheet formulae. Forecasting errors can even result in concerns about stock prices and regulatory issues.
3 steps for avoiding forecasting errors
When creating accurate financial forecasts it’s wise to:
- Make sure you are able to justify any forecasting assumptions
- Be cautious when forecasting – and don’t underestimate the likelihood of events occurring
- Ensure the way forecasts have been calculated are clear and visible to those using forecast for business decision-making.
How Enable rebate management can help you overcome forecasting errors
Forecasting potential earnings is the backbone of financially sound businesses. Key strategic business decisions can only be made when based on accurate information: which requires having a firm grip on financial forecasting process. With pre-made methods of forecasting that can be drawn upon, having structure to your forecasting can increase clarity. Also having forecasting method with a built-in audit trail means you can see what data this forecast what based on and who has edited it. Improving financial forecasting processes to provide true visibility of rebate deals will improve decision-making confidence, allow for the more accurate formulation of business strategy and potentially even reduce accounting risks.
Find out more about how Enable’s rebate management software can help you improve your financial forecasting processes and reduce forecasting errors.