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Value:

How to create a robust

financial forecast

Using a dynamic business forecast can enable the

focus to be shifted to long-term value creation.

By Paul Ashworth, FCMA, CGMA

n the February 2022 issue of FM forecast performance on an ongoing Strategic alignment
we explored value measurement basis for both the underlying drivers Improving understanding of the value-
techniques, the impact of intellectual and the financial outcomes. creation levers available to the business is
capital, and the calculation of a 5. Review the strategic themes, as needed. The underlying drivers generally
I relevant cost of capital. The article necessary, and modify the forecast relate to intellectual capital and will
concluded that discounted-cash-flow model. ultimately lead to finance outcomes that
(DCF) valuations have the potential It is imperative that finance determine future financial capital.
to provide the most justified and develops the expertise to create accurate- To measure the development of
accurate valuations. as-possible forecasts for the short term but intellectual capital and the consequent
This second article considers how also into the long term. The forecasts also financial outcomes, interactions between
processes and capability can be improved need to provide appropriate insight that types of intellectual capital need to be
to provide a robust forecast that can then informs actions to protect and increase mapped and appropriate metrics
be used to provide the projections required business value. identified. An effective approach is that
for a DCF valuation. proposed by Kaplan and Norton, in which
The creation of robust financial Forecasting challenge interactions are described through a
forecasts can be boiled down to five There are too many “known unknowns” business’s strategic themes. These themes
critical steps: and “unknown unknowns” in business to provide justification for projected changes
1. Analyse historic performance to expect perfectly accurate forecasts. in the future values of performance ratios
determine the underlying drivers of However, forecasts should reflect the based on investments in intellectual
financial performance, map the “known knowns” and be well justified, capital (see the example in the chart
interrelationships, and quantify the insightful, and actionable. There is scope “Example Strategic Theme”).
current values of drivers. within most businesses to significantly The offset in time between investment
2. Identify projected future changes in improve forecasting capability. in capability and the realisation of
the values of drivers and the external Factors to consider when preparing financial returns adds complexity to the
factors or strategic themes of the such a forecast include strategic
business that will cause those changes. alignment, managing predictability, Editor’s note
3. Build or modify a forecast model setting the appropriate level of detail,
from the underlying drivers, including ensuring integration of data, and This article is the second in a
their interrelationships and projected forecasting through to the long term. two-part series looking at the role
future values, to determine forecast Businesses that can produce better, of the management accountant in
financial outcomes under various more informative forecasts can gain a understanding, measuring, and
agreed scenarios. significant competitive advantage, reduce managing value.
4. Analyse variances between actual and business risk, and hence improve value.

FM-MAGAZINE.COM April 2022 I FM MAGAZINE I 9