The following is a contributed piece from Marc Huffman, CEO of Blackline. Opinions expressed are author's own.
Since the pandemic has eased and the economy has begun improving, many CFOs have entered spending mode. Spending on equipment has risen 8% over the past 12 months, exceeding pre-pandemic levels by 8.7%, according to Kiplinger data from earlier this year.
Where the money is spent depends largely on financial forecasts, which draw much of their insight from internal financial data. But what if that data is wrong?
To find the answer, we commissioned a survey of more than 1,300 executives and finance and accounting professionals in seven global markets. The findings, published in February, are disquieting. At a time when executives are under more pressure than ever to provide an accurate picture of company performance, 70% of them lack confidence in the data used to make their financial forecasts.
Put another way, CFOs confident about economic stability are loosening the purse strings, but this capital allocation may be based on a forecast few people in the organization have confidence in.
To be sure, much can be gained by spending money to seize business opportunities as the year progresses. The economic expansion that began in mid-2020 will continue gathering stream through 2025, the Congressional Budget Office projects. That means CFOs who make the right bets could be looking at a windfall. In a February poll of 119 public company board directors, 82% predicted profit increases in the next 12 months and 90% predicted revenue increases.
Board and CFO confidence is understandable, but inflationary headwinds, higher corporate taxes and more stringent regulations are all potential deflators in the coming year. Low consumer sentiment is another. And there’s always the possibility of the Delta virus variant or another event taking the wind out of the economic recovery’s sails.
And let’s not forget, the pandemic proved the difficulties of forecasting the cash cycle when business shuts down. Weighed down by unpaid business-to-business accounts receivables, cash flow was unpredictable at best, reminding finance leaders about the importance of real-time and accurate data for cash optimization.
Added up, companies need to maintain rigor in their forecasts, otherwise they’re relying on financial data that might trip them up. Investing capital in a market expansion plan based on inaccurate financial information is a slapdash strategy. The more assured strategy might be allocating money first into the development of world-class forecasting processes.
Scenario plans and stress tests
This makes planning and testing critically important, especially for finance and accounting organizations that are moving toward weekly and even daily forecasting. As Accounting Today reported in February, 8.2% of executives in a Deloitte poll are forecasting on a bi-weekly basis and 11.5% are forecasting daily. If the data supporting the forecast is out-of-date, inaccessible, slow in coming or just plain wrong, it affects the integrity of the forecast and the business decisions that follow from it.
Our survey affirms this dire possibility. More than a quarter of executives (28%) said their finance and accounting department could not provide data quickly enough to respond to unpredictable market changes. And more than a quarter (27%) said they had no visibility into financial scenario planning or stress testing, suggesting their business decisions are based on an incomplete picture of the organization’s health.
The good news is the growing recognition that fast access to real-time and accurate financial data is a strategic imperative. More than one-third of the executives (34%) are considering implementing or scaling automation solutions to increase the reliability and accuracy of their data, while 42% are becoming more focused on scenario planning and stress testing.
These businesses recognize the value of robust forecasts and comprehensive financial information to make intelligent business decisions. Just in time, too, as the economy picks up and companies try to position themselves for growth.