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A guide to Financial Budgeting, Planning & Forecasting

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A guide to Financial Budgeting, Planning & Forecasting

By Mark Cracknell, HAYNE Solutions

The core financial processes that run through businesses all over the world, regardless of industry are fundamentally the same. We all have to collect transactional data (in accounting systems and ERPs), we all then close the period and, hopefully, analyse our performance. We will then all have statutory and regulatory compliance requirements to fulfil, the complexity of which will differ by the size and industry of the organisation in question.

The key to becoming a ‘best-in-class’ finance team who thrive in times of change, opposed to shuddering at the thought of an acquisition or organic growth – is performing these core financial processes efficiently and effectively.

Why is this important?

Well, as the world gets faster, customer needs evolve and become more complex and technology gets smarter, the race for companies to keep up and stay competitive gets harder. To keep one step ahead, business leaders need data, but not just data, they need consistent, accurate data which they can easily navigate through to derive real business value and insight.

All good CFOs and business leaders are looking for real insight which enables them to make a well informed decision to improve performance. However, to add value the finance team need access to the data and the tools to analyse the data as well as the time to perform this task and add value. For the majority of finance team, the core financial processes consume the majority of the period end process, significantly reducing the capability to add insight and value.

To gain real insight, quickly and accurately, these core financial processes need to talk to each other, they need to be sharing data, updating in real-time and deliver ‘one version of the truth’. A great first step to achieving this, is to invest in an integrated Financial Performance Management system, forming the solid building blocks upon which you can move towards meeting modern business demands.

Here, we focus on the Financial Budgeting, Planning and Forecasting process and how you can take steps to make this process ‘best-in-class’.

What is the Financial Budgeting, Planning and Forecasting process (BP&F)?

Budgeting, planning and forecasting (BP&F) is a strategic process for determining and detailing an organisation’s financial goals both long and short-term. It is invariably managed by the finance team.

The BP&F process should formalise the coordination of activities across the organisation while aligning these activities to the corporate goals. By involving decision makers within the process, responsibility and accountability can be assigned and enhanced (no more “not my budget” comments).

If it is used correctly, a budget is the map of the company’s strategic plan.

How to improve the BP&F process?

Out of the core processes, we think that the Financial Budgetting, Planning and Forecasting process is one that can add the most value to an organisation, yet is the most under-developed. There are good reasons why this is the case as this process involves many outside finance (if it is done properly) who all want to have a say in the outcome. Due to this “high user participation” and complexity, it is also likely to be a higher cost to implement compared to financial consolidation.

Despite the above there is no reason why the organisation should shy away from tackling it as the rewards can be huge and provide a real competitive advantage. Looking in the rear-view mirror is all well and good, but the value is in shaping the future not looking at the past.

Due to the many difficulties and complexities of budgeting/ planning, we often find that organisations limit this to an annual budget supplemented by quarterly re-forecasts. For the majority, this extends into a future as far as the year end. As the year end approaches the forward outlook reduces to the point when none exists. This is not good for the organisation. In addition, we often find that the following year budget is only agreed in Period 3 meaning the company is running “blind” for at least a quarter of the year.

Another often overlooked issue is that of variance reporting. If you are only reporting to budget, then each month you end up repeating the same narrative month on month. This is a time consuming and meaningless exercise for all concerned.

Best practice recommends a continual (or rolling) planning process that extends at least 12 months into the future. One of the reasons we do not regularly see this is that spreadsheets find this concept very difficult to deal with.

So, where do you start with budgeting and planning?

We think that this process is best addressed in small stages, starting small and gaining the confidence of the organisation and then developing upon this.

The starting point for us is leveraging upon the financial consolidation phase and collecting budget/ forecast data at the same granularity as actuals are reported for group consolidation. This I have come to describe as the “financial budget/ forecast”. During this phase we are looking to achieve the following objectives:

  • Gain control over the process
    • Version control
    • Visibility of the process
  • Improve consistency
  • Increase frequency

This can be achieved through automating data collection and consolidation. This can be done as a simple extension of the financial consolidation phase, collecting budgets/ forecasts through input templates or Excel add-in. This can be quick to implement as all the building blocks are in place already.

You may even be able to use a current Excel workbook and modify it to post directly in the consolidation solution.

Through these simple steps you will quickly gain control over the budget/ forecast process and create time to move into the next step.

Once the organisation can see the benefits of development so far this can be developed to a rolling 12-month process using functionality that should be standard within the solution.

The next steps to development are then more specific to your organisation. Some will stop there, at the financial budget/ forecast level as they do not require more information at Group. Many will want to take the next step and develop the granularity to a lower level. This may be driver based or at a significant higher level of details.

Examples of this could be:

  • Revenue by customer by product @ unit on sales price
  • Salary costs by employee, split basis + bonus etc

These in turn would feed into the financial budget replacing the values that were previously input. This then extends the capability to analyse and report on variances from the solution without having to switch to another system; but more on that later.

Another way of softening this phase, as it can be a big step is to do this company by company or division by division (as each may have different drivers).

In addition to the above, you will also want to build in scenario modelling capability and to perform “what if?”. These requirements need to be carefully planned when designing these models.

In summarising the above into characteristics, you should be looking for the following:

  1. Strong Excel interoperability
  2. Ability to have multiple dimensions
  3. Workflow
  4. Collaboration
  5. Ability to deal with (potentially) large volumes of data
  6. Modelling capability
  7. Security and control

Points to note/ consider:

  1. Budgeting/ planning is way beyond merely collecting financial values. Therefore, a financial consolidation solution alone will not have the functionality or capability.
  2. Software vendors may try to woo you with industry specific solutions during pre-sales. We find that it is often the case that these require significant modification prior to use within your organisation and therefore have limited value.
  3. Budgeting/ planning solutions are more difficult and time consuming to implement and maintain, compared to financial consolidation.

Ready to start your journey towards Finance Nirvana?

  1. Watch our on-demand webinar series ‘Achieving Finance Nirvana’
  2. Articles to read

3. Contact us for an informal chat

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