New Business Models Are Driving Adoption of Forecasting Tools

Financial Executive Benchmarking Panel - Forecasting Edition

A key driver in determining whether financial executives elect to implement software tools to enhance their forecasting process is the number of business models they are managing. Two-thirds of those with more than one business model use forecasting tools compared with only one-third of those with a single revenue stream. That's according to a survey of 91 small and medium sized businesses (SMB) conducted by RevenueRecognition.com and International Data Corp.

Forecasting tools were defined as business intelligence software as well as capabilities in source systems such as sale force automation (SFA), customer relationship management (CRM), and enterprise resource planning (ERP). Business models were defined as revenue from product sales, services engagements, licensing/royalty arrangements, and subscriptions/usage-based customer relationships.

Resolving Complexity

Despite the fact that companies using tools tend to have more complex accounting requirements due to the different revenue streams they must account for, they forecast more frequently and have higher levels of satisfaction with their forecasting abilities than companies not using tools. Specifically, as shown in Figure 1, the majority of companies that use tools produce forecasts monthly or more frequently, while the majority of companies not using forecasting tools do so only quarterly or annually.

Figure 1
Forecasting Leaders and Laggards:
Using Tools versus Not Using Tools (n=91)

Frequency and timeliness are critical measures of efficiency in the reporting and forecasting process," said Kathleen Wilhide, research director, Corporate Compliance Solutions and Business Performance Management Software, IDC. Increasing pressures such as Sarbanes-Oxley Section 409 require near-real time reporting of material events, and companies can benefit from highly efficient forecasting processes to assess the potential impact of these events."

Forecasting Satifaction

Overall respondents were moderately satisfied with their forecasting abilities. However, there was strong consensus that financial executives are least satisfied with their ability to forecast sales bookings. On the bright side, there was equally strong consensus of above average satisfaction with forecasting recognizable revenue.

At this point, as shown in Figure 2, the consensus ends. Companies that use forecasting tools and those that do not reported very different satisfaction levels with respect to forecasting deferred revenue and recurring contracts. These two categories actually garnered the highest satisfaction ratings from companies using forecasting tools and ranked below average for those not using tools. With respect to forecasting deferred revenue, satisfaction scores for companies using forecasting tools were on average 23% higher.

Figure 2
Satisfaction gaps between companies using
forecasting tools and those that do not (n=91)

Data Fragmentation Key Obstacle

Financial forecasting efforts are also hindered by data fragmentation. As Figure 3 shows, 92% of respondents indicated that they rely on two or more sources for key financial data.

Data aggregation and data reconciliation ranked as the top two most time consuming tasks for these companies, with quality control and complex calculations a distant third and fourth. "IDC research supports the fact that data integration is the largest challenge that organizations face when performing forecasting and analysis" says Kathleen Wilhide. This may explain why two-thirds of respondents take three or more days to complete their forecasting process, and approximately one-third of these companies actually take seven or more days.

Figure 3
How many different data sources are required
to support your forecasting and reporting activities? (n=91)

Companies are looking to improve forecasting accuracy and timeliness," said Gottfried Sehringer, Executive Editor of www.RevenueRecognition.com. Efficiently managing and consolidating different sources of financial data is critical to achieving that goal. It is a key challenge our survey respondents have pointed out and one that companies using forecasting tools are meeting with greater success."

The survey was conducted in Septmber 2004. In all 91 high-ranking finance officials including CFOs, controllers and vice presidents of finance were surveyed.

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