In these times of economic uncertainty, associated with changing business dynamics and increased volatility it is interesting to see how contemporary companies deal with the financial planning process. An extensive benchmark study was conducted of nearly 60 large companies in the Netherlands and Belgium to review budgeting and forecasting against best practices from leading organizations.
The benchmark study from EyeOn reveals that there still is room for improvement for many organizations. The study identified seven prerequisites for reaching a best in class financial planning process:
1. Clear scoping and management support
Particular attention should be paid to the fact that the purposes of forecasting and budgeting differ. The integration between the strategic plan and operations through the budget is key. Budgeting should induce management to manage strategy pro actively, and not focus on short-term fulfillment of budgetary numbers. Target setting itself should be disconnected from detailed budget preparations.
2. Commitment to the different elements of the financial planning process, at all levels
The financial planning process must be driver based and facilitate cross-function plan integration, whilst the required collaboration for this is formalized. In particular, forecasting often requires more and different attention than is currently the case. Reliable forecasting requires discipline and must be treated as a key organization-wide management process involving cross-functional alignment: forecasting provides a chance to better manage the business beyond the walls of Finance alone.
3. Change in attitude of the organization
In particular, the attitude should change towards valuing realistic information, most especially with respect to forecasting. Forecasting should not be about “bringing good news”, but about “providing a timely, realistic business outlook”. Senior management must emphasize that forecasting is a health check. Forecasts are a realistic outlook enabling the business to manage the gap between targets and estimated performance. Forecasting is not a process of resetting targets. With this perspective, behavior in the organization can start to change.
4. Significant reduction in workload and speed compared to the current forecast and budgeting processes
Leading companies prepare their financial forecast in under two weeks and are able to execute the budgeting cycle in a short, focused period and start with this as late as possible, minimizing “spare” months afterwards. They review fewer items more often, understanding more detail does not bring more accuracy. This enables them to develop more experience and knowledge enhancing the quality of the process’ output.
5. A process frequency and time horizon that is aligned with managerial decision making
Business dynamics should dictate the frequency and horizon of the financial planning processes. Limiting the forecast to year-end, for example, means that developments that take place beyond year-end will not be taken into account, even when known and relevant.
6. Capabilities to react to specific events
This enables an organization to react quickly to changing circumstances, such as a material change in business performance impacting only certain parts of the business.
7. Proper information systems
Proper tooling offers organizations more choice in the frequency, level of detail and scope of the financial planning processes. Something of key importance is that these supply the right information, not just more data. Integrated information and one version of the truth enable a single view of the organization and reduce efforts of duplicating data.
Note: This is an excerpt from afponline winter 2011 newsletter. To view full article, please click here