It is difficult to predict the future and all projections are based on a large number of assumptions. Therefore, nearly all projections of performance will be incorrect. However, here are 3 things that FP&A managers can do to improve the probability of achieving planned results.
1. Multiple Scenario and Sensitivity analyses of financial projections will provide an understanding of how key decision variables will be impacted under various scenarios and assumptions.
2. Comparing to recent performance trends: If we don’t change our direction, we will wind up where we are headed! Short-term projections can be compared to recent trends and against last year’s results.
3. Set realistic expectations: Budget includes numerous assumptions, including the probability and estimated impact of potential events. Managers must identify and present how these potential events have been reflected in the plan. Also, managers should set an expectation that a projection is a best estimate of the outcome under the present strategy and expected market and economic conditions. Some organizations clarify this by using language such as “most probable” or “establishing desired confidence levels”.