How Simulation Will Help the CFO Lead a Forecasting Revolution
CFOs have plenty of tools, techniques, and processes to create financial plans for their business. Gathering data from Sales, Marketing, HR, Operations, and Finance provides estimates for revenues and expenses that reflect the deep domain experience of your functional leads. When combined with historical results, the financial plans and forecasts generated have been used effectively for decades.
However, it is nearly impossible to show how the interactions between different functional areas within your organization may affect the overall financial plan. Instead, these separate groups create isolated silos that make it difficult for the financial plan to account for important cross-functional aspects of the business, like how changes in the marketing mix affect sales or how the hiring plan affects productivity as you onboard new hires and they come up to speed.
In addition, a static financial plan cannot anticipate changes in the marketplace. When competitors introduce a new product, or larger societal trends affect consumer behaviors, these events may have unexpected effects on your business which will not be reflected in a financial plan that is developed at the beginning of the fiscal year.
An Opportunity for the CFO
Now is the time for CFOs to incorporate a new approach to forecasting called simulation into the financial planning process. Simulation is used to recreate your market virtually, giving you a platform to perform "what if" scenario testing that helps ensure your company can react to a rapidly-changing business environment and deliver on its growth plans.
Advances in computing power and a focus on usability have pushed simulation beyond academia, making it accessible to business leaders. By simulating an entire market, including competitive activity and consumer behavior, simulation allows your organization to predict how that market will operate by pulling virtual levers (see Figure 1), delivering deeper insights and more accurate forecasts.
So, what does this mean in practice? With the help of the analytics and finance teams, the CFO is able to answer questions about the business to make better, more informed decisions. Here are just a few examples:
- How does your company respond when a competitor introduces a new product, and how will it affect your forecast?
- What kind of investment should you make to improve your product experience, and at what point do you experience diminishing returns?
- Do you acquire a company for a new product or do you develop it yourself?
- Which marketing media are most effective, and how will increased spend affect revenue?
- How much is a licensing deal worth and at what price point will it deliver the ROI you need?
How Simulation Helps the CFO React to Change
In business, things don't always go according to the forecast, so you need to make adjustments. With simulation, you can recalibrate your forecast based on new information and very quickly test new strategies to see how they will help get the company back on track. With simulation, your financial plans become agile, reacting to changing conditions at the speed of business while offering the tools to quickly test out new ideas to grow the business.
By embracing simulation, the CFO fosters collaboration and communication and provides the tools needed to perform what-if testing that incorporates feedback from functional leads across the organization. Led by the CFO, this highly-effective cross-functional team helps deliver better forecasts and deeper insights into how to drive growth while remaining flexible to a changing competitive environment and new opportunities. And this positions the CFO as the go-to resource for go-to-market insights within the organization.
The bottom line: CFOs have more control and better visibility to not only deliver a solid financial plan, but to actively drive the growth of the enterprise.
If you would like to learn more about simulation and how to advance your organization's sales forecasting, watch our webinar, "How CFOs Can Improve Sales Forecast Accuracy with Simulation and Machine Learning." Presented by CFO magazine and Concentric, the webinar features CEO and founder of Concentric, Greg Silverman, along with an all-star panel discussion on the future of sales forecasting.