Most businesses have a process in place for forecasting for the future. Forecasting, commonly defined as “the process of making predictions of the future based on past and present data and most commonly by analysis of trends”, is about being able to account correctly for earnings throughout the year.
This may be an informal process – such as when an individual estimates the future using their experience or gut instinct, or a more formal process using tools such as Excel / other systems. Either way, these figures may be published, or used by other parts of the business for guidance and planning. As a result, the consequence of getting these figures wrong can be costly.
Predicting earnings and the resulting profits accordingly depends on having a good 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 forecasting models.
Forecasting using the multi-tool of the accounting world can let you down over time
The process of managing and forecasting deals has often been handled using the multi-tool that is the Excel spreadsheet. While there is nothing inherently wrong with spreadsheets or multi-tools, both of them can become dangerous when they are over-used. It’s one thing to open a tin of beans with the tin-opener on your multi-tool when you’re on a camping trip. It’s another thing entirely to use it every time you want beans on toast at home.
The same applies to spreadsheets. 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.
The consequences of mis-using spreadsheets for forecasting
If 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 result is a lack of trust: people will stop using them internally, meaning that everyone returns to flying blind. Inaccurate forecasting also results 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 forecasts – which are often themselves hidden in indecipherable spreadsheet formulae. Inaccurate forecasting can even result in concerns about stock prices and regulatory issues.
3 steps for effective forecasting
When creating accurate forecasts it’s wise to:
- Make sure you are able to justify assumptions
- Be cautious – 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.
Next steps: find out more about the cost of hidden errors in financial forecasting for B2B deal – watch the webinar
To find out more detail about each of these three points, or get a more in-depth look at an alternative solution to financial forecasting, take a look at the short webinar on demand we hosted about “The cost of hidden errors in financial forecasting for B2B deals.”
Hear from one of our Business Analysts about the impact of different forecasting processes and how these can be improved — creating greater confidence throughout the business.
In less than 23 minutes we cover the following key points:
- Why forecasting is important
- Formalizing forecasts
- Forecasting using spreadsheets
- What happens when forecasting goes wrong
- 3 steps to more effective forecasting
- The difference between forecasting in spreadsheets and forecasting in a rebate management system.
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 forecasting process.
Improving forecasting procedures 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 rebate forecasting and how Enable deal management software can help. Watch the webinar on demand.