Budgeting and Forecasting – Best Practices

Budgeting and Forecasting

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 a 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 ‎headcounts, 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.

More informed ‎and faster ‎business ‎decisions.‎ Learn How to Plan, Create, Use Budgets