Planning & Budgeting: 5 Lessons Learned



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Planning & Budgeting: 5 Lessons Learned

Stefano Oddone | Jun 22, 2018

I’ve spent last 20 years or so gathering and analyzing Planning & Budgeting business requirements from hundreds of companies ranging from small local ones to enormous multinational enterprises and now being middle-aged, both in personal and professional life, I presume I have learned some key lessons on this critical topic to manage every company’s business.

This blog will dive into my top five lessons learned, with the aim of helping others in overcoming the challenges of this area.

Planning & Budgeting: 5 Lessons Learned

Be Democratic, if you can

“Democracy is a luxury that not everyone can afford” but if you are one of those, Planning & Budgeting processes are definitely worth being democratic about.

The accuracy of every prediction, forecast or even prophecy increases with the number of people participating to it, it’s called “Wisdom of Crowds”: in his book “The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations” James Surowiecki, an American journalist, explains that not all the crowds are wise (hooligans and certain local governments are good examples), there are however four fundamental elements to wise crowds:

  • diversity of opinion
  • independence
  • decentralization
  • aggregation

Companies are usually plenty of the first and lacking in the second, while the remaining two are a matter of organizational model.

Now, if you are thinking “it’s true but the more people involved in the budget the more it costs” it’s time to re-think your Company’s concept of investment and check if you’re using the right tool to manage your Planning & Budgeting processes (quick hint: no, Excel alone is not the right one…in the long run it costs a lot).

Wisdom of Crowds is a so relevant and serious business concept that I invite you to give a look to Lior Zoref TED Speech: you’ll smile for ten minutes and have a clear practical demonstration of what the concept is about.

Planning & Budgeting: Be Democratic

Frequency Counts

Do not be distracted, I'm still talking about business. If we agree that Planning & Budgeting is a key tool to drive a Company (this is at least my opinion), frequency is as relevant as accuracy, repeatability and easiness.

Would you drive your car while keeping eyes closed and just opening them, let’s say, every ten minutes? Don’t be hasty, an acceptable answer is “It depends”; it depends on the scenario and boundary conditions.

If you drive alone on the Bonneville Salt Lake Speedway the risk level could be acceptable but if you are crossing the center of Rome in rush hour you definitely cannot consider even blinking for a second. The same applies to your business environment, think about it and decide to which of the two scenarios above it resembles more.

Then again, If you’re thinking that increasing Budgeting and Forecasting frequency would be too complex or demanding, especially for line-of-business users, I invite you to check if the model you designed and the tool you implemented is the right one for your current and future needs (quick hint: probably models and tools were ok when you initially implemented them, then your Company went through many transformations and the current scenario is tougher than expected).  

Budgeting is a Communication Exercise

Planning & Budgeting is a process aimed to communicate where we want to bring our Company, Department, Business Line, how we intend to do it and check if we’re are reaching our target (or not); doing this by using only figures is too difficult, in my view.

What I mean is that for sure figures and calculations are key elements of every budgeting process, they allow us to fill out models but they can fall short in explaining what’s going on in the real world: if I have to suddenly increase my costs because a warehouse has set on flames, figures will describe the financial effects but explanations and reasons have to be provided in some other forms (e.g. annotations, attached documents, voice recordings, multimedia links,…). Best-in-class Planning & Budgeting tools provide functionalities to enrich the meaning of figures but in my experience these options are not yet exploited as they should be. It is not so uncommon to arrive to situations in which, reviewing plans set 6 or 8 months, people begin arguing why some targets were set and decisions were taken.

If your Planning & Budgeting processes need extra effort to be explained to involved users, if you are no longer able to explain the Budget you negotiated last fiscal year, if you can track the effect of decisions taken but not the reasons behind them, you should check if you are leveraging your Planning tool at its best or, once again, if you are using the right one.

Budgeting & Planning: a communication exercise

“Driver Based o Muerte”

You could ask your Sales Director to plan how much revenue he/she will produce in the next 12 months or you could ask he/she to plan the business drivers to derive the revenue (e.g. sold pieces, average prices, number of customers visits, post-sell services,…), the second is the only effective approach to be able to simulate plans, budgets and business actions. Full stop.

I know, it sounds so logical and obvious but trust me, I still see Companies working with Controllers that ask users: “provide me Total Year figures then I’ll spread them down at monthly level” (dirty secret: sometimes it could be simply a division by 12). Ok, hitting the Target is the main task but also how we define it and reach it are relevant business aspects; splitting the model down to contribution elements, drivers, behaviors dramatically increase the ability to monitor and analyze how Companies are able or not to execute what we have simply imagined when setting Plans and Targets.

If you are focusing on your Company costs (yeah, I know you are…) there’s a chance you have evaluated Zero Based Budgeting (ZBB - if it’s new for you please give a look here). ZBB forces you to have a more analytical approach to Cost Planning and provides a deep understanding on how your Company produces cost. ZBB requires to focus on elements, components, subprocesses that contribute to generate a cost rather than the final cost itself providing you more “handles” to turn and manage your costs structure.

Now, independently from your cost budgeting model, I’ll try to make the drivers relevance clear with an example, give a look to the following schema:

Budget and planning: schema

Now let’s suppose that after 6 months in the new fiscal year both Cost Managers found that travel costs are higher than budgeted, can you guess what happens?  Mngr A will communicate to the Board that they have to cut travels, Sales People better use phone calls rather than visit prospects while Mngr B can analyze the reasons behind the costs increase and evaluate a mix of corrective actions (e.g. fly with cheaper companies, ask to anticipate bookings to obtain better rates, negotiate an agreement with a national hotel chain,…) to present to the Board in order to optimize rather then cut costs structures with limited impacts on Sales People operations and morale.

Yes, this is a deliberately simplified scenario but the basic concepts behind it are universally valid: drivers are the levers to manage the business, if you have a very limited set of them your impact on business will be limited accordingly (and be wise, too many are not useful as well).

Integrate your budgeting and planning processes

If you run a single company your Planning & Budgeting Processes must be Integrated

In my experience significant inefficiencies come from the fact that business targets of various lines-of-business/departments (e.g. Sales & Marketing, Production, Support Services, HR, Operations, …) are not integrated, are not sharing a common view. That is more or less like having a single company but running it as several different ones. Over time, I’ve surely seen progress. Today, most of the companies have some processes in place to try to keep plans and budgets if not fully aligned at least “coherent” (Steering Committees, Quarterly Review Meetings,…) and there are virtuous ones that use the same Planning & Budgeting platform to implement processes across departments, gaining a sense of “integrated by design” (true or not doesn’t matter, Customers perceptions are the only things that count).

Now let’s keep budget integration across Departments aside for a while, there’s an even more critical and dangerous “disintegration” that mines your Company performances and it’s hidden in the Department you don’t expect…AFC!

It’s not uncommon to find Companies where P&L budgeting is pretty comprehensive and structured, often implemented with a market leading EPM Application, while Balance Sheet and Cashflow are still basically manual and not integrated processes; reasons could be various, from loss of commitment (CFO left during project implementation) to resource scarcity (P&L implementation have been so costly that they don’t want even imagine what would take to extend to BS e CF) passing through model complexity. 

What I have described is a fairly recurring situation, never the less having an Integrated Financial view is a key requirement for every Company: no matter your own dimension, business sector or geography, P&L, Balance Sheet and Cashflow are the main tools you use to measure your Company success and be inefficient in this process is extremely risky.

To support AFC Departments on their Journey to Efficiency, Techedge has developed an Integrated Financial Planning Solution to increase financial and cashflow planning accuracy; in addition, being Workforce in the Top 3 cost sources for many companies, we developed an HR Workforce Planning Solution  to manage your distributed Headcount, FTE and Labor Cost Budget integrated with the AFC one.