Financial Planning, Budgeting and Forecasting in Uncertain Times
Fast-changing business conditions call for agile planning, budgeting and forecasting. Learn why best-in-class companies are better at forecasting, collaborating, reducing budget cycle times and analyzing and reporting on planning, budgeting and forecast data.
Planning, budgeting, and forecasting lay the foundation for any effective business plan. Economic uncertainty makes it difficult to set clear goals and objectives and sustain a financial plan which supports them. Organizations must become more agile with their planning, budgeting and forecasting capabilities -- now more critical than ever for success and survival during volatile economic times. The business climate is characterized by change and compounded by global influences spawning unforeseen stresses and squeezed margins.
In a 2008 Financial Planning and Budgeting survey of more than 150 companies, Aberdeen Group found subtle shifts in pressures impacting the planning, budgeting and forecasting process. While speed, agility and accuracy dominated the horizon last year, Aberdeen expects the need to improve agility to adapt to changing conditions to be the number-one pressure facing companies in 2009. This article presents an executive summary of a January 2009 update entitled Financial Planning, Budgeting and Forecasting: Managing in Uncertain Times. Read on to learn what best-in-class companies are doing to plan, budget and forecasting with improved agility and accuracy.
Aberdeen defines financial planning as the process by which a business documents and communicates its strategic objectives in financial terms. A financial planning exercise typically contains detailed plans and budgets, as well as analysis capabilities to show how the objectives are to be realized. Budgeting is (typically) an annual process that often starts with the prior year’s actual performance data, and includes the creation of detailed financial budgets showing expected future performance at a top-line and detailed level across the entire organization. Forecasting is a process by which businesses adjust future expectations based on recent actual performance resulting in the production of an updated forecast document. This can (but does not typically) include adjustments to the budget. Forecasting, re-forecasting, or “rolling-forecasting” can occur multiple times during a budget period, and can span time from one fiscal period to the next.
Companies are now feeling even more pressure to respond to the turbulent economy with increased agility. Not only have general markets become more volatile, the economy has plunged deeper into a recession, causing the reevaluation of many plans and budgets, shifting focus to a different set of objectives, making the more dynamic forecast a much more critical component of the process.
Aberdeen used four key performance criteria to distinguish the Best-in-Class from Industry Average and Laggard organizations (see table below). We first evaluated the budget process itself, including year-over-year improvements in the cycle time, which influences the organization's ability to finalize budgets prior to the beginning of the new fiscal period. We then looked at the accuracy of the overall budget and also tempered this with the ability to grow profits over the last 24 months. Without preservation or improvements in profitability, the overall goals of the planning and budgeting process are compromised.
In determining Best-in-Class performance in terms of budgeting, Aberdeen viewed 100% accuracy as the ideal. Yet realistically, companies will (and should) execute plans to maximize revenue and profits and therefore must take into account changing business conditions, perhaps sacrificing budget accuracy for the overall health of the business. Therefore Aberdeen penalized companies more for over-spending and under-performing in terms of revenue than for under-spending and exceeding revenue targets.
Strategic Actions (click image for larger view)
The shift in Best-in-Class strategic actions from 2008 to 2009 is far from subtle. We see a complete flip in terms of priorities year over year. The top strategy from 2008, automating process flows, is now at the bottom of the list while last year's last place finish, improving data quality, is this year's main priority. Why the shift? First, 100% of the Best-in-Class have invested in applications to assist in the planning process, which inherently brings process automation into play. Now they must turn their attention to making better use of these applications through the formalization and development of processes built around these applications. The most important element of that process refinement is now insuring the quality of the data presented by these applications. With the proliferation of data today, decision makers have become increasingly dependent on it. Yet as the volume increases, we run the risk of the quality diminishing (click on the "Strategic Actions" Chart above).
By eliminating manual steps and automating the data gathering process itself, results are significantly enhanced. This also creates the opportunity to involve more decision-makers from various areas of the business, whether defined by job role or level within the organization.
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