How To Avoid These 10 Common Financial Forecasting Mistakes

Thursday, 25. November 2021 | 0 Comments

Financial Forecasting MistakesFinancial forecasting plays a fundamental role in positioning an organization for sustainability and growth. However, there are basic forecasting errors that can negatively impact the success of an organization and reduce the credibility of the finance department.

Here’s a look at the most common forecasting mistakes and how to avoid them.  

 

Avoid These 10 Common Financial Forecasting Mistakes

  1. Focusing only on incremental change

In forecasting, the heavy emphasis on revenue opportunities or spending can miss opportunities for impactful improvement. Focus on the entire picture. Instead of just focusing on revenue opportunities or cost-cutting situations, focusing on actions like implementing invoice automation tools, for instance, can lead to overall impactful improvement, besides productivity and efficiency. You can explore GetMyInvoices digital invoicing that benefits saving time by downloading invoices automatically.

  1. Leveraging for cost-cutting

Although fixing an annual budget is a crucial function of forecasting, it can lead to a hostile environment and adversarial relationships if the budget gets solely based on cost-cutting. Therefore, establishing partnerships with business owners (for shared accountability) is preferred.

  1. Singular ownership of financial results

A wholly centralized or decentralized approach for accountability over financial results in an organization may result in you missing the mark. Strong shared accountability between business partners and finance professionals is the way to go.

  1. Overanalyzing the intricacies of a complicated financial issue

Over-analysis leads to financial paralysis. The overall value of the solution to be implemented gets reduced because of the time taken to come up with the solution and implement the same. It is better to provide insights, outcomes, and solutions that are good (but don’t have to be flawless) and easy to understand.

  1. Leveraging a singular dimension

Financial forecasting based on a singular dimension that seems to drive revenue and costs can be ineffective. It’s better to identify multiple dimensions that are compelling drivers for cost and revenue. A multi-dimensional business view with lower priority drivers and multiple variables will protect the business from vulnerabilities.

  1. Forecasting to the original goal

Do not hold individuals accountable for the initial goal (without acknowledging the changes). It creates a false feeling of confidence. It is advisable to identify the errors and the changes that need to get implemented. A flexible approach is vital.

  1. Solely banking on trend forecasting.

Sole reliance on trend forecasting leads to a limited view of what drives the results of the organization. Attributing only sales production to revenue is an example. You should identify and consider other factors that may be connected firmly to revenue.  

  1. Heavy dependence on a forecasting model

Heavy dependence on quantitative financial models (based on historical data) can lead you to miss the mark. These models don’t consider essential variables that impact outcomes. Therefore, relying on communicative relationships between model operators and business operators is critical apart from a financial model.

  1. Relying heavily upon staffing trends

Relying heavily on staffing trends, although helpful in predicting the future employment requirements, isn’t practical. It’s also important to focus on other factors such as the implementation of automated AP process and software, education, and so on that play a significant role in determining the staffing requirements of a business.

  • Aligning with the plan for growth

Aligning your forecasting (that should be realistic) with a growth plan (optimistic by nature) is another common mistake. Overestimation of staffing needs and ignoring attrition is significant mistakes, and it is essential to base your forecasting on while considering attrition and staffing truths

The way forward

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