How to master Forecasting as an Accountant

forecasting
Written By Christian Wattig

Image by Miguel A. Amutio via Unsplash

It’s the bread and butter of FP&A, so you need to start there.

Here is my 7-step process:

#1 Use your accounting skills to identify business drivers

You are great at preparing financial statements, so you have attention to detail. So, take a closer look at the financials. Dive deep into the variances from one quarter to the next and compare them to the same quarter of the previous year.

Consider what happened in other parts of the P&L when revenue jumped or dropped suddenly? Did marketing expenses increase? Did discounts fluctuate? Or did a new feature come online (R&D cost hitting operational costs)?

#2 Understand your business drivers

Now that you identified issues to talk about, take them to the budget owners in the commercial team. However, I’d recommend not to ask what they think will happen in the future. That’s because you haven’t yet built enough of an understanding to be able to tell when an assumption is overly-optimistic or pessimistic.

Instead, ask them about why drivers changed in the past. Do we have a good understanding of the causes? If so, what are internal and external factors that contributed?

#3 Create ranges

Look at each major driver and create worst-case, best-case, and expected scenarios. Refer back to what you learned about how much things fluctuated in the past. While not perfect, taking possible ranges from historical data is a good starting point.

#4 Consolidate

Now you have all the ingredients to create your first view of the forecast. Simply put the scenarios for each business driver on a spreadsheet and calculate what the overall best, worse, and expected outcome is. Don’t forget to brainstorm probabilities for each case so that you can arrive at the weighted average of all scenarios.

#5 Ask business partners for their forecast

Congratulations, you are now ready to ask your cross-functional business partners about what they think the forecast should be for their respective areas of expertise.

#6 Compare the sum of business partner forecasts to your version

An essential rule of forecasting is to use different methodologies. Because combining them is a fantastic way to remove bias. See, your business partners will have likely given you highly conservative figures.

That’s because they have to deliver the results and want to be able to “beat” the forecast. And your top-down approach may have been leaning optimistic since you are farther away from the details.

#7 Discuss the differences

Most value is generated in this final step. That’s because the second you finalize a forecast it becomes outdated. So, make sure you have enough time to talk to your business partners about the differences between their forecast and yours. Again, it’s not about who is right but about what the risks and opportunities are and - crucially - how to mitigate or use them to your advantage.

Christian Wattig
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