It’s Getting Harder to Provide Solid Earnings Guidance.
Over the past two months of visits with clients and partners, one question has continued to arise: “How can I provide official guidance amidst all this turbulence and uncertainty?” For CFOs of public companies, publishing guidance data on revenue, sales trends, capital spending, and other KPIs has always been one of their bigger reporting challenges—but in the face of supply disruptions, tariff changes, and the hangover from rampant inflation, it’s become nearly impossible to provide accurate guidance. It’s also becoming clear that global economic uncertainty is here to stay, and not a short-term disruption to manage through. Companies need all the clarity they can get.
Guidance isn’t a legal requirement for businesses. Many companies have given up providing guidance or limited their guidance only to longer-term forecasts. Others have recently included information about their tariff exposure in their guidance data, or even shared multiple conditional forecasts. Still, for many companies we serve, these public forecasts help demonstrate stability and build investor trust, which is especially welcome when so much else is unpredictable. Even if you can’t achieve 100 percent accuracy, getting your earnings guidance directionally correct is worth the effort.
In our work with clients, we’ve found that a few technical competencies can help clients deliver more accurate, useful guidance to the market. Companies that want to continue providing guidance should assess their capabilities and then develop a plan to improve them. To see more clearly, companies should prioritize these competencies in this order:
Basic Competency: Data Readiness
Companies that have already invested in enterprise technology may see their financial forecasting, supply chain planning, and revenue operations all run more efficiently, but without data readiness, they’ll still struggle to align. Bringing information together from these disparate organizations will let you see all the factors that affect earnings in one place, and give you an analytics capstone to gain greater visibility.
This visibility can have several effects on your business you might not have previously considered. When this data is brought together holistically, the finance team can help sellers adjust their strategy, and sales data can inform better operational projections. To achieve this competency, focus on a few key objectives:
- Have a single source of truth. Your team should know where to go to get the answers to their revenue questions and know that those answers will be correct. That means building one place where data is available and consistent. Note that this doesn’t necessarily mean one centralized database. An approach such as data mesh will allow decentralization so that business users can have self-service data capabilities, while still allowing IT or a data team to maintain governance over that data. The important thing is building confidence that data is accurate and complete.
- Establish data governance processes. One important part of maintaining accurate data: having a formal process for how that data is collected, managed, and secured. To make sure your earnings guidance is as accurate as possible, create and enforce a framework to maintain common data definitions, data quality, security, and compliance.
- Use data from more parts of the organization. Your company’s revenue performance is the final product of numerous teams’ work. As you build your data capabilities, integrating multiple platforms into your data architecture will give you access to deeper insights about your company’s performance, strengthening your ability to provide good earnings guidance.
- Make data accessible. Everyone in your company responsible for developing earnings guidance should be able to access the data they need quickly and efficiently. That may look different for various team members, from building standalone dashboards to embedded analytics. Just make sure everyone has the data they need to do their jobs.
Intermediate Competency: Scenario Planning
Once data is handled, companies should look at their scenario planning capabilities, and how they can be improved for better earnings guidance. In a moment when almost everything is in flux, companies will need to be able to evaluate the impact of various factors, either positive or negative. Companies aiming for more accurate guidance can align their forecasting to facilitate better scenario analysis in several ways, including:
- Consider what’s most important. While companies do benefit from looking at multiple variables together, they can also block themselves from effective scenario analysis by including too many. Too many details results in teams spending too much time accumulating data and not enough time on analyzing their scenarios. This also makes it difficult to build a new scenario, which can be a problem when your company needs to issue new guidance quickly in response to a new development.
- Limit your scenario assumptions. While modeling an earnings guidance scenario, avoid changing too many assumptions at once. Testing too many variables makes it more difficult to understand the cause of a variance in the results—so you’ll need to run more scenarios to get good information. Pick a few key variables to test per scenario, and you’ll ultimately spend less time setting them up.
- Focus on material drivers. Another way to simplify scenario planning: When setting up your scenarios, select the drivers that you expect to have the biggest impacts. Then, test those assumptions: What happens if your biggest accounts reduce spending? How would new regulations affect production costs? Other tricks, like using relative forecasting methods, can help you avoid conducting detailed build-ups, saving more time.
- Consider how scenario analysis will translate to decision-making. Before rolling out your scenario planning tool, be sure you understand how it will be used. Identify the people responsible for reviewing the results and making decisions, and set guidelines for how decisions are made. You should also have open channels with senior management to understand the scenarios they’re concerned about, and a channel through which to present your findings.
Advanced Competency: AI-Enabled Solutions
Just as a GPS device can give you greater precision on where you are and where you’re going, AI can give you greater accuracy in forecasting, resource planning, and risk assessment. Most technology vendors have already integrated AI into their offerings in numerous ways, and earnings guidance is a good area to deploy targeted solutions for some quick wins.
While there’s no shortage of software vendors that will try to sell you new AI-powered tools, it’s always simpler to start with something you already have. Many SaaS providers are building out new AI components within their tools, and you might either have access to these components already or be able to access them as a simple add-on to your current software. Do your research to understand what is available and how to use it. A few areas where AI can help shape your earnings guidance include:
- Financial planning & analysis. Companies that can automate some of their planning efforts will have more time for more advanced planning, allowing them to feed better inputs into their revenue forecasts. AI solutions exist to make predictions for your forecast, simulate scenarios, and automate budgeting. Once you’ve established your data foundations and scenario planning capabilities, there are plenty of ways to shave off hours and increase accuracy with AI.
- Accounts payable and receivable. When your current income streams are easier to manage, they’ll also be better indicators of what you can expect next. AI can help you automate your invoice processing and streamline your cash flow management, and it can also help give you better insights through predictive payment behavior analysis. Whatever areas are causing you trouble, there’s an AI offering that can help here.
- Financial reporting. Building custom reports for everyone who needs to interact with your data can quickly take up time. Companies that need their answers faster are increasingly turning to AI to automate report generation with real time dashboards. You can even set up natural language processing to give you executive-ready report summaries.
- Audit compliance. AI isn’t just a way to generate data—it’s also a helpful way to check your own work. AI tools can provide continuous auditing and monitoring with compliance checks and anomaly detection, faster and more accurately than doing it manually.
- Financial close & cost management. When it comes time to close out your budget, your company can use automated reconciliations and intelligent exception handling to streamline things. In addition to giving you a better handle on your revenue for guidance purposes, you can also use AI to optimize spend, evaluate suppliers, and even automate some procurement tasks.
Better Technology Can Deliver Better Earnings Guidance
Amidst all this uncertainty, you can be confident that technology and process investments will help you move forward. By providing better guidance, you’ll bring some stability to your company, and by setting a foundation for better projections, you’ll be better prepared for whatever comes next. The pieces are there—it’s now the time to link them together.
This isn’t the first moment of uncertainty Spaulding Ridge has helped clients face. Throughout COVID-19 and the high inflation that followed, we worked with companies to deliver innovative solutions and improved business outcomes. Whether you’re working to provide better earnings guidance or to navigate a higher-tariff landscape, we can help you achieve clarity. Reach out to learn how we can support you.
