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Using financial forecasting as a strategic catalyst for enhancing the financial performance of manufacturing companies in Kigali, Rwanda

1David Nyambane and 2Nalubega Cissy

1Faculty of Business and Management, Kampala International University, Western Campus, Uganda.

2Faculty of Business Administration (Accounting and Finance Option) of Mount Kenya University Kenya.

ABSTRACT

Business organizations prioritize their financial performance, channeling significant effort into achieving superior results. This pursuit often involves setting targets, managing quotas, and focusing on crucial key ratios. Financial forecasting emerges as an indispensable tool in plotting the course toward optimal performance. It stands as a strategic asset that assesses strengths and weaknesses, becoming the cornerstone of decisions across production, inventory, personnel, and facilities. In the realm of manufacturing firms, effective financial forecasting isn’t just pivotal—it’s the linchpin for survival, growth, and sustained success. This study delved into the financial forecasting methods commonly employed by 842 manufacturing firms in Kigali, Rwanda. A sample of 90 firms, involving Directors of Finance and Accounting staff, illuminated insights critical to understanding this landscape. Results revealed that sales and profit forecasting reign supreme, embraced by 37.78% and 38.89% of these manufacturing entities, respectively. Yet, challenges persist, notably in achieving forecast accuracy and managing associated risks. Recommendations stem from this diagnosis, suggesting the establishment of review committees dedicated to enhancing forecasting methodologies. Ensuring the credibility and reliability of this study involved employing the test-retest method to validate and solidify the consistency and accuracy of the data. This approach underpins the findings, indicating that similar research efforts would yield consistent results, reinforcing the authenticity of the depicted ground reality. To bolster financial performance without limiting operational agility in a swiftly changing business environment, the study emphasizes the need for continued improvements in forecasting processes. This includes not only refining methods but also devising strategies to navigate unforeseen challenges effectively.

Keywords: Financial performance, Financial forecasting, Strategic financial planning, Accounting staff, Manufacturing firms.

INTRODUCTION

Financial planning is a continuous process of directing and allocating financial resources to meet strategic goals and objectives. The output from financial planning takes the form of budgets. The most widely used form of budget is Pro Forma or Budgeted Financial Statements. The foundation for Budgeted Financial Statements is Detail Budgets. Detail Budgets include sales forecasts, production forecasts, and other estimates in support of the Financial Plan. Collectively, all of these budgets are referred to as the Master Budget [1, 2]. According to [1], we can also break financial planning down into planning for operations and planning for financing. Operating people focus on sales and production while financial planners are interested in how to finance the operations. Therefore, we can have an Operating Plan and a Financial Plan. However, to keep things simple and to make sure we integrate the process fully, we will consider financial planning as one single process that encompasses both operations and financing. Financial Planning starts at the top of the organization with strategic planning. Since strategic decisions have financial implications, you must start your budgeting process within the strategic planning process. Failure to link and connect budgeting with strategic planning can result in budgets that are “dead on arrival”[1, 3]. Strategic planning is a formal process for establishing goals and objectives over the long run. Strategic planning involves developing a mission statement that captures why the organization exists and plans for how the organization will thrive in the future. Strategic objectives and corresponding goals are developed based on a very thorough assessment of the organization and the external environment. Finally, strategic plans are implemented by developing an Operating or Action Plan. Within this Operating Plan, included is a complete set of financial plans or budgets. Financial Planning is a continuous process that flows with strategic decision-making [4]. The Operating Plan and the Financial Plan will both support the Strategic Plan. The best place to start in preparing a budget is with sales since this is a driving force behind much of our financial activity. However, we have to take into account numerous factors before we can finalize our budgets [1], budgeting should be flexible, allowing modification when something changes. For example, the following will impact budgeting: The life cycle of the business, financial conditions of the business, General economic conditions, Competitive situation, Technology trends and Availability of resources [5]. Budgeting should be both top-down and bottom-up; i.e. upper-level management and middle-level management will both work to finalize a budget. We can streamline the budgeting process by developing a financial model. Financial models can facilitate “what if” analysis so we can assess decisions before they are made. This can dramatically improve the budgeting process. One of the biggest challenges within financial planning and budgeting is how to make it value-added [6, 7, 8]. Budgeting requires clear channels of communication, support from upper-level management, participation from various personnel, and predictive characteristics. Budgeting should not strive for accuracy but should strive to support the decision-making process. If we focus too much on accuracy, we will end up with a budgeting process that incurs time and costs over the benefits derived. The challenge is to make financial planning a value-added activity that helps the organization achieve its strategic goals and objectives.

The budgeting process at most companies is the most ineffective practice in management. It sucks the energy, time, fun, and big dreams out of an organization.  It hides opportunity and stunts growth.  It brings out the most unproductive behaviours in an organization, from sandbagging to settling for mediocrity. When companies win, in most cases, it is despite their budgets, not because of them [9]. According to [10], Although issues with the existing forecasting and budgeting process and systems are often well-known, it is important to fully document and communicate their impact to gain executive sponsorship, drive momentum for change, and ensure that the benefits are understood. This is especially true since many of the benefits are qualitative and focus on accuracy and accountability.  Frequency and Timeliness Annual forecasting and budgeting cannot keep pace with today’s dynamic business environment because the information produced is often out-of-date and irrelevant. Managers need to be able to understand and respond quickly to the impact of competitive forces and rapid changes affecting their business. Yet most organizations fail to forecast the financial impact of these changes fast enough.  [11], the failure of forecasting is particularly painful given the ever-heightening need for it: product and service life cycles are shorter, competition can come from anywhere in the global market place and every company must be flexible and forward-looking to survive. What’s more, the tools and technology to enable better forecasting have matured. Business performance measurement (BPM) applications, now in their second or third versions, are gaining greater integration with major enterprise resource planning (ERP) applications. And these tools are at the disposal of the chief financial officer (CFO), who now takes an increasingly strategic role in the business. The purpose of this research therefore is to find out how financial forecasting influences financial performance.

CONCLUSION

Forecasting is an integral area that has implications for a firm’s financial performance. Notwithstanding, some key areas were ignored as others were given innumerable attention. A majority accorded sales forecast and profitability much weight, of which as a researcher I don’t dispute yet the invaluable statistical approach was given little attention as compared to its significance in determining the right course of action. The means to improving financial performance also had Budgeting, Review and improvement, proper planning and a focus on critical data as the strongest recurring themes. In conclusion, among the obstacles indicated as depicted in the findings, risks uncertainties and time form the top challenges to financial forecasting at 47.78% and 23% respectively. As anticipated in a normal business cycle, risks and uncertainties that prevent a business from achieving its financial goals are commonplace and the only thing a business can do is attempt to minimize the impact of identified risk.

Recommendations

To consistently manage performance, companies need timely and accurate forecasts that can guide decision-making in near real-time as well as support strategic goals in the long run. The best forecasting practices are highly flexible –able to model multiple scenarios and adjust to rapidly changing conditions. When executed correctly, forecasting can help a firm streamline processes, respond to changes, evaluate business drivers, and improve processes and workflows. The best forecasts are built on accurate, relevant data in addition to a healthy dose of process automation. In today’s dynamic business environment, forecast accuracy should be managed and measured as each forecast is prepared and that is weekly, Monthly, quarterly etc. To help oversee the process of financial forecasting, a review committee can be set up with guidelines that shape and improve methods that will impact the accuracy of future forecasts.

Suggestions for Further Study

A similar study should be conducted that will involve the firms registered in the four Rwandan provinces and establish the situation of such firms that are not within Kigali, for this can give a much more accurate picture of the whole industry. Future research should also concentrate on new areas such as the barriers or challenges to financial forecasting and a firm’s growth. These areas are important because when companies grow, several challenges must be faced and ultimately overcome. By using the findings from this and future studies, manufacturing companies, especially in Rwanda, would be able to progressively grow and emerge as vital players within the industry, either locally, regionally or even at a global scale earmarked for excellent practices.

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CITE AS: David Nyambane and Nalubega Cissy (2023). Using financial forecasting as a strategic catalyst for enhancing the financial performance of manufacturing companies in Kigali, Rwanda. INOSR HUMANITIES AND SOCIAL SCIENCES 9(2): 51-65. https://doi.org/10.59298/INOSRHSS/2023/5.5.4000

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