I once worked with an organisation that took 18 months to complete its annual budget process. I thought they were pulling my leg. I compared it to getting up before you’d gone to bed but was met with stony silence and a few pained grimaces.
Their timeline reflected the amount of detailed work that their budgeting process entailed. The careful modelling of how costs were built up. The minute variances that drove their sales figures and hence their stock requirements. The painfully intricate cost of sales analysis including standard costing for goods produced, as well as studying detailed standard cost variances over the previous year to fine tune those costs. Staff costs, marketing costs, wastage costs, property costs and utilities were all given the same treatment. Very clever people doing terribly clever analysis, to produce carefully modelled budgets.
If you thought my gag about getting up before you’d gone to bed went down badly, you should have seen their faces when I asked if any of this effort actually worked. “What did I mean worked?” I asked if their budgets or forecasts ever matched their actual results, and the answer was no.
“Planning for the future by assuming
that it looks like the past is over.”
Something has changed in Financial Planning over the last couple of decades, and not every organisation has cottoned on. Predictability has left us. Planning for the future by assuming it looks like the past is over forever. But the future still looks more like yesterday than last year.
What needs to change when you’re Planning and Forecasting?
One: forecast more
Frequency is the most obvious change. A once-a-year budget may (just about) be warranted, but we all acknowledge it goes out of date very quickly. If you need to do it, fine, go ahead, but give it the attention it deserves. It will only be useful as a benchmark for the actuals to be compared against. Forecasts, meanwhile, cannot be a once-a-year activity. If not monthly, then quarterly, adopting one of them as your budget to save any additional effort.
Two: accept that perfection doesn’t exist
Aiming for perfection is a fool’s errand. 18 months to produce an out-of-date budget gets you no nearer perfection so change the mind-set. Aim for a tolerance level that suits each part of your business’s functions. Maybe tolerances on manufactured product costs could be 98%, while stationary forecasts can be 75% or less. Perhaps Staff Costs can be 95% accurate since people do unexpected things like leave, so how accurate can you really be? Spend appropriate amounts of time aiming to get a good approximation but accept perfect doesn’t exist.
Three: use scenario planning
Try using scenarios. Best case/worst case scenarios can be a better route than aiming for a perfect prediction. Aim for the best but plan for the worst. Simpson Associates have developed FORECASTED, a planning and forecasting solution that makes scenario planning very easy. Creating new scenarios based on a previous plan takes a few minutes, then simply change whichever assumptions or figures you want to flex, and you immediately have a new scenario.
Four: have a Plan A, and a Plan B, and a few more besides
Business scenario planning is more than just best case/worst case. Try doing what-if analysis against any major policy changes or business decisions before they come into effect. What if lock-down is lifted and what if it isn’t? Play around with different dates. If your model supports scenario planning, then this should be easy. A business needs many plans. Some companies I know are well onto Plan E or F by now. Others ripped up Plan A and had nothing to replace it with. Some companies don’t create multiple plans because their existing forecasting software cannot easily create them, or their models are too big to replicate. We use IBM Planning Analytics (formerly Cognos TM1), which still has TM1 as its modelling engine and copes brilliantly with large planning models and presents its outputs in IBM Planning Analytics Workspace (PAW) so the whole business can be involved.
Five: move from perfect planning to agile planning
Divert all that effort that went into perfect planning towards agile planning. Spend your time modelling your business and then spend limited time each month or quarter fine-tuning or creating new scenarios in a fraction of the time.
If you want to be able to plan with agility, using a solution that enables you to do scenario planning, can be built either bottom-up or top-down, need to involve more people and still need to model large datasets, but you don’t know how to make all of that happen, please speak to us using our live chat, where one of our experts will be happy to talk with you in more detail. And in the best traditions of agile planning, do it very soon.
Paul Baron, FP&A Engagement Manager, Simpson Associates
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