Forecasting in Complex Environments
- Karen Conway
- Aug 27, 2024
- 5 min read
Why forecasting is a key financial task and how to undertake it
A key requirement when dealing with Government funding is providing accurate and timely forecast information to the funding entity. Whilst it can be particularly challenging for local authorities delivering complex infrastructure projects, this is a key financial task required by the funding entity to manage overall funding within the Government funding rules. This article sets out the importance of forecasting, some of the challenges that exist in a complex environment, and approaches that can be adopted to manage these.
What is a forecast?
HM Treasury’s Budget Holder Forecasting Handbook[1] provides a detailed definition as to what a forecast is:
An honest assessment, given the best information available, of the future financial and delivery position of an organisation and its activities.
A prediction of future requirements based on data and assumptions about influencing factors. It is the expected expenditure against your allocated budget and agreed outcomes. It is a key output used to inform you and your organisation.
The Budget Holder Forecasting Handbook also stresses that forecasts are rarely static. They evolve and change during the financial year and the stage of the project being funded and delivered, so you should regularly revisit the data and information driving your forecast.
Why is it important to forecast?
As set out in the Budget Holder Forecasting Handbook, a forecast helps to plan for changes in priorities, aids decision-making and helps with modelling impact on performance. Forecasts are unlikely to be 100% accurate, but it is important to understand when it changes and to have mitigations in place to minimise variances. As a budget holder or grant recipient, you often have formal, delegated responsibility to manage the fund or grant within the terms of the agreement. It is therefore important that responsibilities are executed with sound financial management. This is where forecasting is essential.
Accurate and timely forecasting supports the management of funding/grant process through:
Better decision-making occurring earlier – enabling current and future planning;
Informing short and medium-term planning, especially with a multi-year project or initiative;
Providing high-quality information – supporting decision makers to make the most informed and effective decisions on spend and resource allocations;
Helping teams at all levels understand what is expected to occur;
Understanding and reporting on uncertainties, risks, and opportunities, including the impact of micro and macro-economic factors and markets;
Supporting financial management – in the context of financial planning both in year, and within Spending Review periods, forecasts are essential for budgeting, cash flow management, and investment decisions, ensuring financial stability and sustainability; and
Building trust and reputation through reliability of forecasts from the funding body.
Why is it difficult to forecast at times?
At times, due to the nature of the environment operated within complex regeneration projects, it can be difficult to forecast accurately. Some challenges include:
Economic Climate: factors such as borrowing rates and implicit market confidence that can vary and there is little to no control around this. Therefore, this can make it difficult to forecast futures;
Unexpected Issues: there may be a range of unexpected issues encountered, such as architectural discoveries on site or particularly bad weather, that cannot be readily factored into plans and can cause significant delays to projects, slipping spend and elongating delivery;
Planning Permission: the planning system is complex and can sometimes take longer than assumed, particularly for innovative or contentious schemes. Delays in getting planning permission granted can make it difficult to forecast due to uncertainty around the project;
Data Limitations and imperfect information: forecasting may often rely on interpreting historical data. The availability, quality, and relevance of data can vary, posing challenges in accurately capturing past patterns and trends and how this may inform current forecasts. For regeneration schemes, data may be directly linked to design maturity and where is the project in the lifecycle (i.e., RIBA Stage). A greater level of forecast certainty often arises once the scheme has been procured and a contractor appointed;
Assumptions and Biases: forecasting involves making assumptions about the future, and these assumptions can introduce biases and errors particularly when based on incomplete or inaccurate information. Project promoters and/or contractors are overly optimistic about the timescales for delivery (optimism bias), which can often occur before and during the procurement process.
What are the benefits to accurate forecasting and budgeting?
Forecasting enables accurate and timely decision making to enable better value for taxpayers’ money. This is because forecasting supports and aids central planning as it enables:
Variances to be identified early and funding entities to manage and address these and re-allocate resources where necessary;
Unlocking the greatest value, by facilitating and enabling progression or prioritisation through informed, evidence-based strategic decision making;
Support to the funding entity’s regular financial performance assessments with HM Treasury;
Ministers and senior leaders to make better choices on where to prioritise and distribute public money, including better information in unforeseen situations where urgent spending decisions are needed; and
Better informed future policy design and implementation.
Forecasting in complex environments requires a strategic and adaptable approach.
Any forecast inevitably contains a degree of uncertainty, because it is a plan for the future and thus certain assumptions are made. It is important to quantify and understand how much uncertainty there is within a forecast. A strategic and adaptable approach to forecasting may consider the following:
1. Scenario Planning: Developing multiple scenarios to account for different potential outcomes. Consider what would happen if, for example, additional conditions are applied to planning permission. What impact would discharging these have on delivery timescales and costs? This approach allows for a more comprehensive understanding of the range of possibilities and helps in preparing for various eventualities. In some circumstances, it may be appropriate to present forecasts as a range (e.g., a central scenario and then showing more optimistic or pessimistic forecasts as underlying assumptions change).
2. Stakeholder Engagement: Engaging with stakeholders across different functions and levels of the organisation and closely with contractors to gather diverse perspectives and insights. This can help in identifying blind spots and gaining a more comprehensive understanding of the complex environment.
3. Continuous Monitoring: Implementing a system for continuous monitoring and feedback, to track the accuracy of forecasts and to identify early indicators of potential changes in the environment.
4. Risk Assessment: Conducting a thorough risk assessment to identify potential disruptors and uncertainties that could impact the forecasted outcomes. Developing risk mitigation strategies to address these challenges.
5. Embracing Uncertainties: Acknowledging the inherent uncertainty in complex environments and being prepared to adapt forecasts as new information becomes available.
6. Effective communications: Ensuring that there are clear and direct communication routes between funder and grant recipient and the ability to maintain dialogue. This supports early warning of likely changes to forecasts and the reasons behind these. Across a funding or grant programme, this can support the identification of thematic challenges or opportunities.
If you would like more information on this topic, our engagement Subject Matter Experts (SMEs) will be hosting a series of events on financial management and financial modelling. To register to our next event on Good Financial Management click this link.
Karen is a Qualified Accountant (ACCA) with over 20 years' experience in the private and public sector. Across the public sector she has had a number of roles within finance. She also has a breadth of experience as a Finance Business Partner working and developing financial and management reporting, planning, budgeting and forecasting within finance functions and Major Programmes.
If you have any questions on this topic, or would like support, please contact your Delivery Associate, or email DeliveryAssociatesNetwork@Arup.com
