Best Practices for Budgeting and Forecasting
1) MAKE PLANNING PART OF THE CORPORATE CULTURE
It is critical that a company’s culture embraces and rewards planning. Excellent business management requires excellent ﬁnancial management. which in turn requires a company-wide commitment to excellence in reporting budgeting and forecasting.
Most companies acknowledge the importance of corporate planning and claim to be actively participating in ongoing planning.
But in reality, senior management may be engaged in strategic planning, with ﬁnance running the budgeting show and department managers viewing the annual planning process as an unwelcome chore. So this is not the picture of a company that truly embraces planning.
Instead, companies that desire excellence in planning set achievable strategic objectives, demand that these goals be met, and reward those who do so. They require department managers to produce their own plans and tie incentive compensation to their ability to manage their business and achieve their goals.
In such an environment, ﬁnance can provide tools and support to the managers, functioning as an important ally instead of an obstacle.
2) ALIGN THE STRATEGIC & OPERATING PLANS
Within the “excellent ﬁnancial management equals excellent business management” culture. the next step is to ensure the ongoing alignment of the strategic and operating plans.
Because of their responsibility to engage department managers in the planning process. Finance has the unique opportunity to help clearly communicate the corporate strategic plan to the individuals who run the business. So finance can help translate strategic goals into speciﬁc departmental plans and related expense drivers, such as headcount and equipment.
By translating their strategic goals into operational plans, and by tracking and measuring performance against plan. leading companies are able to make meaningful progress in achieving their objectives.
3) START AT THE TOP & THE BOTTOM
An important ingredient in successful budgeting and forecasting lies in a company’s ability to plan from the bottom-up and to meet top-down strategic objectives.
Some companies establish top-down targets and then turn the annual budget process over to ﬁnance. with a mandate to meet the numbers.
Other companies require detailed bottom-up planning and then “plug” the total company numbers at the top so that the plan meets strategic targets. Neither of these approaches reﬂects a commitment to planning excellence.
Instead, leading companies provide initial guidance from senior management — a top-down perspective on strategic goals, objectives, and expectations.
Department managers build a plan from the bottom-up, showing how they intend to meet those goals. This process will often require frequent iterations for the top-down and bottom-up approaches to meet.
The result is a plan that:
- Is supported by department managers, because they helped create it and will be rewarded for meeting it.
- Is supported by senior management because the operational goals are aligned with the strategic goals.
- Is supported by ﬁnance, because they added value to the productive, collaborative effort, rather than demanding participation in an exercise with little added value.
4) DRIVE COLLABORATION BETWEEN FUNCTIONS
Not only should strategic and operating plans be aligned, but plans between functional areas should also dovetail. Best practices include direct involvement from line-of-business managers and a collaborative approach to budgeting and forecasting.
In addition to understanding strategic goals, department managers also need to know what other functions are planning. For example, in a company that is planning a new product rollout, manufacturing needs to ramp up production, marketing needs to produce new collateral. And sales need to add new headcount.
But the marketing plan should also include programs timed to support the new sales reps. The facilities department needs to plan for new headcount, equipment, and product storage. And so forth.
This collaborative planning can be accomplished through an iterative process. That provides managers with the opportunity to forecast and share different scenarios with each other. Finance can play a key role in facilitating the coordination of plans across the company.
5) ADAPT TO CHANGING BUSINESS CONDITIONS
Firstly The preceding best practices establish a foundation for making better business decisions. The next important steps are evaluating actual progress against budget and re-forecasting in response to changing business conditions.
All businesses, particularly those in ﬂux, are better served by a planning process that can quickly adapt to change in the company or in the market.
The key elements of such a process are:
- Frequent Re-forecasting: Especially in fast-moving, quickly growing businesses with multiple market pressures, forecasting may be needed on a monthly or even biweekly basis.
- Ongoing re-forecasting will help managers to continually answer critical questions such as “What did we expect?”, “How are we doing against our plan?”, and even more importantly, “How should we adapt our plans as a result?”
- Rolling Forecasts: A company engaged in ongoing rolling forecasts is always looking forward to the immediate or near-term future. The forecast timeframe should extend out two to eight quarters, depending on the volatility of the business.
- Planning should be an ongoing process with frequent opportunities for managers to view the latest internal and external data on how the company is doing.
- They should be able to make alterations to their plans based on new information, which can come from many sources, including other managers, monthly actual data, and revisions to top-down targets. Finance should be able to quickly consolidate plan data from all areas of the company and to disseminate new information in real-time.
- This process will facilitate more informed decision-making in areas such as pricing changes, product line changes, capital allocations, organizational changes, and the like.
6) MODEL BUSINESS DRIVERS
An important feature of a ﬁrst-rate budget or forecast is that it is based on a model with formulas that are tied to fundamental business drivers.
Simply importing and manipulating past actuals does not reﬂect the underlying cause and eﬀect relationships in a business.
Building modeling into plans provides a way to ensure appropriate consistency across functions. It also provides a way to promote planning coordination between functions. For example, future sales forecasts can be tied to the marketing expenditure needed to generate the necessary number of leads.
Finance can provide managers with a useful model that includes information about past actuals and current headcount, as well as formulas that are driven by assumptions. This does not violate the best practice of requiring department managers to be responsible for creating their own budgets.
Instead, it saves them time by providing a solid framework to ﬂesh out a starting point that contains important information about their organizations’ relationships with other functions. It also harmonizes with the best practice of collaboration across functions.
7) MANAGE CONTENT THAT IS MATERIAL TO THE COMPANY
A focus on material content in budgeting will free managers from unnecessary detail, enabling them to produce better plans. While supporting detail can provide an audit trail and insight into managers’ thinking. more detail does not necessarily make for a better plan.
According to a Hackett Group study of planning best practices, So the fewer the number of line items, the better the planning practices. Hackett found that world-class companies average 15 to 40 line items in their budgets. Compared to highly inefﬁcient companies that averaged 2,000 line items.
Managing material content means that a company pays attention to whatever has a real. And signiﬁcant impact on expenses, revenues, capital, or cash ﬂow.
This company will:
- Avoid false precision. A complex model might not have any more precision than a simpler model.
- More detail and intricate calculations can lure managers into the trap of thinking their plan is , therefore, more accurate.
- Monitor volatile — not stable — accounts. Eﬀorts are best spent on ﬂuid expenses such as headcount and compensation.
- Aggregate accounts. The budget does not need to reﬂect the same level of detail like that in the general ledger.
- Even if the GL has 15 diﬀerent travel accounts, managers can often plan in one.
8) BE TIMELY & ACCURATE
The ﬁnal best practice is to ensure that the planning process is timely and accurate. Many companies have an inefﬁcient and inﬂexible planning process, at the center of which is the annual budget. These are ’ time-consuming distribution and consolidation processes that practically guarantee that the plan data is irrelevant before it is even shared. And plans based on stale data and assumptions are of no value.
World-class organizations have been able to shorten their planning cycles by implementing the best practices described here. They have also leveraged technology so that they can manage budget consolidation and aggregations in real-time.
Technology can especially help improve timeliness and accuracy in the area of consolidations. Real-time consolidation removes the necessity to manually process results, leading to a smoother, more consistent, and more accurate planning process.
Variance reports delivered within two to four days from the period close allow managers to immediately evaluate their performance against plan and then eﬀectively adjust their businesses as a result.
At an operational level, this type of planning will be less costly and will produce more accurate results than the processes followed by most companies today.
At a strategic level, a company’s ability to make timely and sound ﬁnancial plans will allow it to provide more credible guidance to stakeholders, and to make better.
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