The truth is often far removed - most management accountants still rely on a planning methodology designed in the early 20th century and a bewildering tower of spreadsheets. Long hours, questionable accuracy, and the ever-present danger of the spreadsheet tower collapsing under the strain, means that most financial managers dread the planning process.
Most organisations currently plan their businesses on an annual cycle structured around the financial year - top-down strategic planning by senior management starts about six months out, leading into the annual budget; a detailed bottom-up exercise designed to align proposed cost centre expenditure with the top-down plan for the coming year. Once the new year starts, and the first month's actuals are in, the budget will start to be revised in a forecasting process that tends to be high-level, quarterly, and less structured than the annual budget.
Out of these three distinct planning activities, it is the annual budget process that leads to most dissatisfaction amongst all concerned, and consumes most time and money. Based on an outdated model of a command-and-control business structure, the process engenders mistrust between senior and middle management as both sides engage in a highly charged political battle to secure a lower or higher cost budget respectively for the year ahead. This battle can rage for months, distracting attention from external events and draining the energy of all involved.
Worst of all, the hard-fought budget outcome becomes redundant within a matter of months, being overtaken by back-of-an-envelope forecast calculations that are produced in a hurry by senior management, in response to changing market conditions or big new ideas. Often this forecast "process" is carried out without consulting cost centres, further undermining the morale of middle management.
The Aberdeen Report, based on a survey of 167 organisations, outlines the reasons for, and the benefits of a "beyond spreadsheets" approach to financial planning, budgeting and forecasting.
The consensus of management accounting theory over the past twenty years is that, to ensure the planning process is relevant, accurate, and most importantly, that it encourages business managers to deliver the right results, it is essential to incorporate three aspects that are absent from the current model:
Where plans are developed in collaboration with business managers, they are far more likely to succeed than those built by finance or senior management in isolation. Ownership increases, and the planning burden is spread. This is of course much easier said than done, requiring as it does a level of mutual trust that has been systematically eroded by the old way of doing things. Much has been written on how to break through this barrier of mistrust and cynicism, most notably by Hope and Fraser in their seminal text Beyond Budgeting, and there are some outstanding examples of companies who have acted on these approaches and had dramatic success.
Modelling the business using key drivers, such as sales volume and headcount, ensures that the plan is consisten and flexible, allowing faster and more accurate scenario modelling as all elements of the plan move in step with the change being modelled. Most financial managers these days have a good sense of the drivers involved in their business, but are often frustrated by the inability of their spreadsheet models to give them a true sense of the sensitivities involved, preventing them from giving clear guidance to operational managers. This is where multi-dimensional modelling technology can help, in combination with the rigour of Activity-Based Costing/Management (ABC/ABM) approaches.
A rough estimate delivered today is worth far more than a detailed plan that is three months out of date. The old budget model was built around the relatively static world of the early 20th century, where market conditions were unlikely to change substantially from one year to the next. Budgets could safely be based on 'last year + x%' as an incentive for managers to do a little better this year in what were assumed to be the same prevailing external conditions. The world has changed radically since then, and the pace of this change is increasing exponentially, requiring new approaches that can re-model a changing business quickly. The planning process must be streamlined, with as little time as possible spent on data collection and consolidation, and far more time on 'what-if' analysis and scenario planning.
Learn about the hazards of spreadsheet-based planning and the prevalence and types of errors plaguing everyone from Olympic organisers, to researchers, to financial professionals.
Speeding up and improving the planning process requires a revamp of the process and technology used to deliver it, and in particular the emphasis on the spreadsheet model, which has traditionally been the default toolset available for quick financial and operational planning.
For while spreadsheets are great personal productivity tools, they are not designed to be a multi-user, enterprise scale financial and operational planning application, and spreadsheets alone are no longer the answer with digital disruption having transformed the corporate landscape. Competition and convergence are ubiquitous, and businesses need tools that can rapidly evaluate trends and exploit data analytics to improve decision-making and drive corporate strategy.
Read how leading CFOs are navigating the chaos and steering their organisations to profitable growth: Redefining Performance: Insights from the Global C-suite study - The CFO perspective
Operational efficiency, accuracy and agility are vital to compete in today's age of disruption and cannot be achieved by spreadsheets alone. In fact, the technical solution requires a robust multi-dimensional data (and metadata) repository, which has workflow to enable multi-user collaboration, as well as the capability to make continual changes to the models being deployed.
Effective Demand forecasting requires the agility to predict changes to customer demand based on internal as well as external data and make decisions that can help optimise supply chain. Integrating demand planning, supply chain planning and financial planning as an Integrated Operational Planning solution is the optimal solution though this often requires detailed redesign of the underlying planning processes to streamline and integrate decision making but does offer very considerable benefits and savings to those organisations who invest the time and effort.
This is where IBM's and Anaplan's Business Analytics software comes in to play, particularly:
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