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The Importance of Being Accurate – Budgeting, Planning and Forecasting: A Critical Business Process

Originally published January 19, 2010

Jonathan Karpoff, professor of finance at UW Business said, “Today’s Chief Financial Officer must be something to everyone: the firm’s top accountant, the CEO’s strategic partner, the gatekeeper for new initiatives, the chief metrics officer, the head of financial reporting compliance, a spokesperson for external constituencies, and the board of directors’ new best friend. . . She, or he, must be the super CFO.”

The pressures on CFOs are increasing in this age of governmental regulations, financial markets and the internal need to provide accurate financial data more quickly. These pressures are rising so much that CFOs are re-examining the structure and operation of their organizations. Beyond their most basic job function of being responsible for all things financial, both internal to the company and external, they are being challenged to partner with operational areas to drive consistency and efficiency across the entire organization.

Consistency and efficiency contribute to enhancing the company’s performance and the achievement of key business goals, operationally and financially. A performance management framework enables the stakeholders to define plans to achieve these goals, monitor the progress and adjust the plans based upon actual input. Planning and monitoring, therefore, become an integral aspect throughout a business cycle.

Why Planning is Important

As organization’s senior leadership sets goals for milestones to be reached, it is the responsibility of the management team to create initiatives to achieve these milestones. Each will yield an outcome and require a set of resources – it is these outcomes and resource requirements that need to be planned.

For example, an organization that provides services is required to forecast the offerings demanded in the near future, and determine whether they are equipped to meet that need. “Will the sales force be able to effectively drive significant demand?” “Is the delivery capacity available to meet the anticipated demand that will be generated by the sales force?” These questions can only be answered once a sales plan has been created and compared to the staffing demand.

These planning goals affect internal, external and financial decisions based upon the organization’s commitment to these objectives. Therefore, it is critical that these commitments are achieved and that the associated processes provide accurate results.

Most planning processes have been an evolution within a company as organizations have grown. Typically, plans are created within spreadsheets and shared among a small number of those who direct the business. As organizations grow, their supporting infrastructure generally grows faster than the planning infrastructure since planning occurs once a year. As organizations mature, the planning processes required mature as well. However, the plans are still managed within spreadsheets.

A Painful Process

Compiling data for analysis to create each fiscal year plan requires large efforts because the contributors for this data are not centrally located and they each manage their information in different spreadsheets. Thus, the CFO and finance teams spend massive amounts of time collecting this information to generate plans.

Because the effort is disparate and manual, it requires three months of the finance team’s devoted effort to consolidate and prepare the plan for the next fiscal year. And, if time allows, the team updates the forecast and plan quarterly to reflect changed conditions, whether it is needed or not.

To be more effective, companies need to find a way to make revisions to plans and forecasts in real-time when changes begin to occur. But, for most, there is no mechanism in place to initiate this process. Without the planning process being improved, updating plans more often than quarterly distracts the contributors from their primary tasks of revenue generation. And, no longer is the plan produced three months ago relevant for next month, let alone for the year of the original plan.

A New Approach – Adapting a Performance Management Framework

Many organizations will employ rolling forecasts, where the future months are updated by those responsible for that aspect of the organization. Rolling forecasts can provide more current plans, but can also be time consuming and take people away from more important work. And, their input may not reflect actual situations and not be timely enough.

A performance management framework enables organizations to set goals they hope to achieve, metrics by which to measure the success of the business units’ achievements, monitor the results and adjust the plan to ensure goals are attained. Whether an organization is looking to create a performance management framework or if one already exists, the following changes improve the efficiency of the performance management team and enable the organization to react more quickly as their business climate changes.

  1. Goals, Short-Term supporting Long-Term Objectives: Organizations set long-term objectives which are communicated both internally and external. These provide insight into the direction the organization is heading. Their short-term goals should provide a foundation to achieve their long-term goals, yet provide more flexibility to adjust to short-term changes within the economy. Enlisting business units to drive initiatives to support these goals is critical to the success of the performance management program. The success of these initiatives depends upon how quickly business units realize a change is occurring, the root cause of the change and how quickly corrective action can be taken.

  2. Identify Internal and External Drivers: Organizations should seek to understand the internal and external factors that impact their success. These factors become the inputs to the planning aspect of the performance management framework. By altering these inputs, a spectrum of varied outcomes can be identified, providing a range of an organization’s critical success factors. For example, home builders would monitor interest rate futures, unemployment and any new home purchase incentives backed by the government.

  3. Constantly Evolve: Once the plan is developed, these drivers are monitored for any changes. Enabling the change to be analyzed to determine the root cause will enable the correct actions to be taken. If the deviation is significant and the analysis warrants, then re-planning would be initiated to alter the planned outcomes and adjust business decisions to minimize the negative impact and maximize the opportunity, which ever the case may be.

  4. Integrated Information Systems and Business Processes: Information systems need to support the processing of data dynamically and in real-time to enable the identification of variances as soon as they occur. This information needs to be presented in a clear, concise manner that will enable the responsible person to query the data in a way that provides enough information to take necessary actions.
One of the actions would be to initiate re-planning activities to account for the significant change in business drivers. This would involve alerting the planning contributors to submit their revised plans based upon the changed information, and having the planning system set up to accept these new plans immediately. The delays between data analysis and initiating the corrective business actions must be minimized. It is therefore essential to tightly integrate information systems and the corresponding business processes.

Driver-based planning like this enables organizations to derive multiple plan versions based upon likely variations and create an expected operating range for the organization. It becomes easier for the organization to monitor any potential shifts in planning and adjust to ensure that outcomes are maximized. By tightly integrating technology, data and business processes, key resources can be alerted to the variations, respond to the planning activity and analyze the impact, thus working to foster the success of the initiatives.

It is critical for an organization to understand the true drivers of their business. Only through this knowledge can realistic strategic goals be set. By leveraging technology to monitor the business drivers, variations can be detected and investigated, and appropriate actions can be taken with minimal human intervention to effectively minimize adverse effects upon your organization. Only when deep business insight is enabled through technology will a performance management framework meet its fullest potential.

  • Chris ColvinChris Colvin

    Chris Colvin is a senior BI solutions architect for Avanade. He has been in finance, planning and analysis type roles from both an analyst and a systems perspective in several industries. He has been consulting with organizations in business intelligence for more than 10 years in healthcare, retail and financial services using various BI tools such as Hyperion and Cognos. Since joining Avanade, Chris has worked with companies to implement solutions providing insight into their financial and operational aspects of their business leveraging Microsoft technologies as an enabler.

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