Let’s talk about forecasting.

Much of the lead up to the new rules governing revenue recognition, set to go into effect for most firms in 2018, has centered around the likely impact on contracts and accounting policies, and rightly so. The big accounting change for contracts comes from the new approach in which revenue is recognized only when a customer is satisfied as opposed to completion of a measurable event, such as product delivery.

However, whither the impact on the financial planning and analysis (FP&A) folks?

“While there is a very heavy focus on getting accounting records aligned with the new revenue standard, developing accurate revenue forecasts is also of the utmost importance and should not be neglected,”  said Jason Pikoos, a partner at Connor Group who leads the firm’s Financial Operations practice. “This information often shapes the company’s long-range strategic plans, defines sales targets and incentive compensation, and provides a forward-looking barometer of the health of the business.”

Or, as Tim Saunders, Vice President of Finance at Tintri, stated quite simply, “Accurate revenue forecasting is as essential to a public company and companies that will go public as having audited financial statements.”

In an item published by Ventana Research discussing both the requisite planning necessary for the new guidance and clear inadequacies posed by spreadsheet use, the thought floated for the imbalanced attention is because not all companies will experience a material impact on their core accounting processes.

“The new rules will have little or no impact on companies whose contracts are not significant to their business operations and therefore have little or no impact on their planning and budgeting processes,” as stated in the article, titled “Planning Is Necessary for Revenue Recognition Under ASC 606 and IFRS 15.”

According to Ventana, the main challenge for FP&A groups in companies materially affected by the new rules is having the ability to plan corporate events (contract bookings and commission payments, for example) in parallel with accounting events, for example, forecasting when deals will close and when revenue from them will be recognized. The piece notes such activity would be challenging given routine alterations in the size and scope of contracts, such as engineering and construction, for example, or an inability to create a consistent model demonstrating differences between ‘real’ and accounting events – possibilities more likely than many folks realize.

Those who think their planning and budgeting won’t be affected should think again.

Mayci Cheng, a senior manager with Connor Group helping to drive ASC606 operational implementation efforts for the professional services firm,  said companies may not fully appreciate the the new guidance impact on how some costs may be recognized.

“Under ASC606, companies may need to revise their forecasting models to make sure the forecasting assumptions and measurement aligns with how both revenue and costs will be recognized,” Cheng said. “This may also change targets for key measures and KPIs.”

Saunders, whose VM-aware storage firm uses RevPro, said “it’s still early days for ASC 606 implementations” to know the full extent of new guidance impact on forecasting.

“As part of the change, though, companies will have to do more to explain the basis for their forecasts, particularly the impact of ASC 606 adjustments,” he added.

Kathy Pearson, Zuora’s Director of Technical Accounting, knows all too well the critical nature of forecasting. Stepped up expectations as a result of the new guidance will only increase the need for accurate forecasting figures, she said.

“Revenue teams know forecasting well,” said Pearson. “They are hit hard before the end of a quarter with everyone wanting to know what the revenue number is going to be.  With the new standard, forecasting does not stop with the last item shipped off the dock at midnight. A level of forecasting will now be required as part of your financial disclosures.”

Pearson added: “Per ASC606, you will have to disclose the amount allocated to  unsatisfied or partially satisfied performance obligations and an explanation of when you expect to recognize that amount as revenue – your backlog and deferred revenue forecast. Having a strong process is even more important as now it is potentially auditable.”

Companies seeking to plan out and budget both ‘real’ and accounting numbers in parallel can no longer afford to rely on spreadsheets. Those in FP&A organizations attempting such a task better brace for long working hours tracking complex data imports, period-to-period differences and cumulative variances, according to the experts.

Aren’t you glad we talked about forecasting?