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FP&A Done Right: The Office of Finance in the COVID-19 Economy

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Three months ago, we could not have imagined life as it is today. We’re experiencing an economic slowdown that none of us have seen before. Not a single industry is immune from the impact of the U.S. and other countries sheltering-in. Many businesses and industries are down, decimated and are temporarily or permanently closed. Others, like those in the streaming and video conferencing industries, online grocery shopping and third-party restaurant delivery services are booming.

This volatility puts tremendous pressure – both in the form of threats and opportunities – on the CFO and the Office of Finance. There are many questions facing the CFO. Let’s take a look at what some recent reports indicate, and how CFOs and the Office of Finance can arm themselves to be better positioned to respond to both the threats and the opportunities presented by today’s market.

CFOs’ Concerns

CFOs are concerned with the potential length of this downturn.  CFO surveyed financial executives and found that they are taking immediate financial action to “survive revenue and profit impacts.” More than half of these executives are estimating a drop in sales between 1 – 20% in the first quarter of 2020. But on a positive note, 46% said they expected a “V-shaped recovery.”

The Office of Finance in the COVID-19 Economy

McKinsey & Company recently wrote about The CFO’s Role in Helping Companies Navigate the Coronavirus Crisis. In it, they state,

“The CFO can play a strong, central role, alongside executive peers, in stabilizing the business and positioning it to thrive when conditions improve … The CFO is the leader, after all, who most directly contributes to a company’s financial health and organizational resilience day to day.”

CFO reports their second concern was cash flow. This is critical, but not unmanageable. This is where the Office of Finance plays a central role in helping the organization survive. Your 2020 budget, plan, and forecast are all irrelevant now.  You need to adjust your forecast to give an accurate financial outlook to senior management and investors. Your forecast must reflect new operational metrics for changes in production facilities, staffing and purchasing. It is imperative to change your forecast to show long-term plans for banks and other lenders.

To do that you need to understand what your business model looks like now. Not what it did when you put together your original FY2020 forecast. But what it looks like today, with schools, malls and restaurants closed, production lines stopped or transformed into making PPE, shipments delayed, and vital parts of our supply chains overwhelmed.

Do you have an accurate understanding of your model? The time to act is now. The business environment is uncertain now, and it’s impossible to predict what the next few quarters will look like – regardless of your industry, size, or location.

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FP&A Done Right: Spreadsheets are Outdated

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This is a guest blog post from our partner Workday Adaptive Planning, written by Adaptive Insights’ Founder Rob Hull. It was originally published on FEI Daily.

The global marketplace is moving faster, requiring companies to be more agile than ever in this age of urgency. Yet businesses—and specifically finance teams—still rely on tools that sustained them decades ago. Those tools were designed for an age when planning was an annual, top-down and linear process, but today we no longer have the luxury of devoting an average of 77 days to develop an annual plan. Change is continuous, so planning must be too.  And it must also be more collaborative.

The rapid change in our technological ecosystem is causing a growing number of finance chiefs to tell their staff to find tools better suited to modern business planning and analysis than spreadsheets — for decades the default planning application for virtually every business. The inconveniences of spreadsheets for planning and analysis, such as version control errors stemming from manual data entry, clumsy email collaboration, and the challenges of creating a single source of truth from disparate data sources can now be a distant memory thanks to modern planning tools. As Bernard Marr observed in Forbes, spreadsheets may still be a great choice for some tasks, but not for the kind of agile planning and analytics required in today’s fast paced business environment.

From the cloud, a different way to plan

These and other observers have pointed to the rise of cloud-based planning software that has taken the fundamental capabilities of the noble spreadsheet and turned them into something that spreadsheets never quite managed to be – automated, intuitive, collaborative, integrated, multi-dimensional, and always up to date. Just as cloud-based CRM applications like Salesforce.com replaced legacy applications like Siebel, so too are cloud planning solutions replacing spreadsheets and legacy applications to provide much needed agility in today’s era of urgency.

Spreadsheets are a wonderful personal productivity tool, and as such will continue to have a place among business applications. But for company-wide finance, sales, and workforce planning, reporting and analysis, the future will look different than the past.

The future of planning is unfolding

With the advancement in technology, we’re starting to see menial tasks accomplished through automation, making time for teams to spend on high value tasks. Finance execs report that, on average, 83 percent of their staff’s time is spent on manual, menial tasks like data input and consolidation. That’s lost time that could be converted to more valuable and strategic tasks with better tools for planning, reporting and analysis.

Pinsent Masons LLP, a UK-based law firm with offices throughout Europe, the Middle East, Africa, Asia, and Australia, found that swapping out spreadsheets for cloud-based planning, reporting and analysis helped automate previously manual tasks, freeing finance staff to be more strategic. “We spent 70 percent of our time entering and verifying data, and 30 percent viewing and interpreting it,” notes Andrew Brett, who heads financial reporting at Pinsent Masons. “We now can spend seven out of every 10 hours gleaning insight from our data.”

Meanwhile, anytime, anywhere access and intuitive application design make planning far more collaborative. Spreadsheets are great for individual users, but in small groups, they’re less great and in large groups, they’re abysmal. On the other hand, cloud solutions were built for collaboration. They allow any authorized participant to work on a plan, from anywhere, at any time. Better still, you’ll always know who made changes and when. Leading cloud vendors have introduced intuitive planning interfaces that make it easy for non-finance personnel to collaborate, enter data, create reports, and run what-if scenarios because they recognize that in business, everybody plans.

Organizations that make the digital transformation leap for planning will see gains in scale and speed. The spreadsheet wasn’t built for enterprise scale, but the cloud was – modern cloud-based planning solutions can support thousands of concurrent users and highly complex multi-dimensional models. Modern solutions are also built to address the performance demands of enterprises. The most advanced cloud planning software solutions use powerful modeling engines that add memory and compute resources when needed and remove the data limits finance pros have come to despise.

Teams can also access data from every corner of the business. Manually importing enterprise data into spreadsheets can be complicated and troublesome — and that’s being polite. In contrast, the best cloud platforms automatically integrate data from your ERP, HCM, CRM and other transactional data sources so that you can refresh data with a single click and know you are working with the latest information.

Mind the gap

There’s a dangerous gap that can emerge when companies rely on outdated processes while their competitors embrace new, more agile ways of working. Agile teams produce market-leading results. The gap yawns even wider for companies still relying on tools developed for the way businesses operated before the internet changed…well, everything.

Holistic company-wide planning isn’t the pipe dream it once was – it’s now a business imperative and it’s the key to unlocking the kind of agility that turns planning into a competitive advantage. Realizing this, more and more execs are coming to the same conclusion: On the journey to the future, spreadsheets for business planning have become as archaic as the Rolodex.

Rob Hull is the founder of Adaptive Insights, a Workday company. Rob had a vision to provide modern finance leaders with an easy-to-use SaaS-based solution to manage business performance. Today that vision is a reality for thousands of businesses around the world.

This post also appeared on the Workday Adaptive Planning blog.

Read additional FP&A Done Right blog posts from our partner Adaptive Insights:

FP&A Done Right: Can you Recover from Static Planning?

FP&A Done Right: How to Improve your Financial Reporting Process

FP&A Done Right: 3 Barriers to Business Agility

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FP&A Done Right: The Victors of the Decade Combine Agility and Resilience

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As we near the end of the decade, it’s a good time to think back about what businesses have learned from an FP&A perspective, and how they can fortify and position themselves for the next decade and for future decades.

The beginning of this decade saw the evolution of online analytical processing (OLAP) systems, such as our beloved TM1, grow into comprehensive and sophisticated platforms for holistic financial and operational performance management. In theory we had the tools to empower Finance to reveal the secrets of business success locked in our systems and in our data.

The last few years of the decade have seen our imaginations captured by the disruptors, the unicorns and those who have seemingly mastered the elusive “digital transformation.” But as we’ve learned over the last quarter, some of those “darlings” of the business world may not be the successes they first appeared to be. Take WeWork for example: the company has not managed growth effectively. They are at a point (or possibly past it) where Finance could step in, do some serious analysis and revisit the company’s business model. Other headline catching companies are growing exponentially, but struggle with delivering profits. This too, points to where Finance can be playing a larger role.

Business Resilience? Or Agility?

These musings were prompted by a recent article by McKinsey on business resilience. When we think about disruptors and unicorns, we might associate them more with the popular FP&A theme of business agility. One of our business partners, Adaptive Insights, frequently talks about business agility in the context of needing to make faster and more informed decisions. The backbone of this is continuous planning, which is spearheaded by the Office of Finance.

In one sense, perhaps, business agility is the young business, the quick, rookie running back on the football field – dodging and weaving and making stellar plays, with end zone celebrations when the offense is in control of the game.

But where does resiliency come in? To me, the resilient business is the more established, mature defensive linebacker, whose job is to thwart the competition, and who is less likely to be celebrating in the end zone, but just as important to winning the game.

The question for all of us, on the precipice of a new decade is, “Will we be playing a mostly offensive game in the next few years, or a mostly defensive game? Perhaps both.” And furthermore, how do we, the CFOs and the leaders in the Office of Finance, best prepare, plan and enable our organizations for what’s to come?

Facing the Future

McKinsey mentions that while we are still in “the largest global economic expansion in history, the outlook is uncertain.” Isn’t it always? The article states that in the company’s latest survey on economic conditions, “executives’ views on the current global economy and expectations of future global growth are less favorable than they have been in years.” I’d posit a good executive is outwardly optimistic and inwardly financially, cautiously pessimistic.

It is in this context that McKinsey examines what makes a company resilient. The article defines resilient organizations as those that exhibit a “willingness to take decisive action to strengthen their balance sheets and improve cash flow before the [previous] downturn hit, often by divesting non-core assets, reducing debt, and improving the efficiency of working capital.” To become a resilient business, McKinsey recommends the following three steps:

  1. Enhance the role of the finance team. They recommend doing this in strategic planning, business analytics and decision-making at all levels of the organization. As the article states, “The best way to do this is to embed finance managers alongside business unit leaders and empower them to be partners in running the business.” Think about that for a moment – take the traditional “bean counter” out of Finance and put her or him with the business unit leader. Imagine the possibilities: the finance professional knows where the data is, how to get answers from that data, and how to slice and dice that data in different ways. The business leader knows what questions to ask – questions urgent for today’s business challenges and vital for tomorrow’s business opportunities and threats.
  2. Pressure test capital structure and scenario plan. McKinsey recommends doing this with both capital structure and cash flow, and using a range of scenarios, “from an economic crisis to other disruptive events.” You might feel somewhat certain your industry will not have a massive disruption like that of Uber on the taxi industry. But what if you are a sports arena? How much overall revenue could, for example, MetLife Stadium lose should there be an NFL strike? Over how many games? While that is not a global crisis, it is an economic crisis with impact far beyond ticket sales. On a global level, are companies pressure testing and scenario planning for the potential impact of Brexit, of various international tariffs and trade disputes that, significantly increase the price of French cheeses and wines served at the high-end luxury suites at a stadium?
  3. Take immediate action to harvest hidden value from their balance sheet. McKinsey research shows “that working capital management is surprisingly variable, even among companies in the same industry.” The organization has found that “large companies that make a focused effort can typically free up more than $100 million from working capital and redeploy it to priority projects.” This argues for going beyond traditional budgeting and embracing more flexible planning methodologies, such as rolling forecasting or active planning. For example, McKinsey revealed that they saw “upside realized by companies that consistently track cash returns on an asset level and that make an ongoing effort to reevaluate and mitigate their liabilities.” With traditional budgeting and planning, you are assessing your balancing sheet in the past. By adopting rolling forecasting or active planning – where you have the tools and skill sets to assess and adjust your balance sheet proactively – you have the power to gain this upside.

As McKinsey states, “While most CFOs have a role in setting company strategy, the rest of the finance organization are sometimes viewed as passive scorekeepers. Best-in-class organizations, in contrast, expect their finance professionals to play a substantial role with business-unit leaders to set strategic priorities.”

Your Game Plan: Find Your Enabling Technology

So, what’s your best game plan for the coming years? McKinsey specifically mentions these best-in-class organizations have finance teams that “utilize innovative performance management tools to help determine how the business is actually performing and suggest steps to optimize results.” At Revelwood we’ve been consulting on and delivering solutions for financial and operational performance management for 25 years. One would think most mid-sized businesses have moved off of spreadsheets for their budgeting, planning and reporting activities. But, day-after-day, our team here speaks with not just new upstarts, but established, even large, publicly traded companies that rely on spreadsheets as the backbone of their core activities in the Office of Finance. Spreadsheets have a role in the Office of Finance and always will. But any organization that uses only spreadsheets simply can’t achieve true resiliency. And they can’t embrace agility.

Your Game Plan: Think Differently About the Office of Finance

How can you unlock the potential hidden within your finance team to add true value to the business? Think differently about how to enhance your team members’ roles. Maybe it’s even a matter of breaking up some aspects of the physical office and having finance team members sit among their associated business units. Separate their function from their strategic role. Be agile about how you think about your people and what they can do for the business.

The End Game: Resilience and Agility

As I mentioned, we think the victors of the next decade will strike a good balance between resilience and agility. Or, offense and defense. Invest in the right enabling technology, rethink the role of the Finance team, and build the skillsets and mindsets for both. That’s your best game plan.

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FP&A Done Right: What Prevents Business Agility

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This is a guest blog post from our partner Workday Adaptive Planning, written by Gary Cokins. Cokins examines what business agility really means for the Office of Finance.  

There’s a lot of talk these days about business agility. Yet it’s much more than just a trendy new business term to throw around at a networking lunch. Ask any C-suite executive if their organization could be more agile, and they will likely answer yes. But what does agility mean, and why does it matter?

An agile company can respond quickly to change as it happens, opening the door to new opportunities and minimizing the risks of threats and challenges from competitors, changing market conditions, digital technology disruptions, etc. If your company can think fast, be nimble, and move first, it’s positioned to gain a significant competitive advantage in today’s data-driven, fast-paced world.

A problem is many companies over-plan and under-execute. To be competitive today, companies must embrace a “speed to results” culture. This does not mean a “ready-fire-aim” approach to decision-making and actions. But they must move fast with a constant sense of urgency.

“Any company designed for the 20th century is doomed to failure in the 21st,” says David Rose, CEO of Gust. In other words, agility is no longer a nice-to-have. It’s the cornerstone of modern business success. But achieving a responsive, dynamic organization is easier said than done.

Barriers to agility are often so entrenched that overcoming them can seem incredibly challenging, especially when compounded by static, manual planning. Relying on racked-and-stacked table reports is insufficient. Robust modeling software, enhanced with visualization features, is needed.

Ultimately, business agility is about having the right tools to efficiently manage and measure change quickly, accurately, and comprehensively. And most of that comes down to how you plan. What is needed can be referred to as “active planning.”

Here are the three primary barriers to business agility:

Barrier #1: Manual processes and ad hoc reporting

Most finance teams use Excel to create reports, track financial projections and budgets, and synthesize numbers across departments. And it’s no wonder. Excel is an effective tool for building custom formulas, scenarios, and look-ups. As a stand-alone budget and reporting tool, however, it has some significant drawbacks, including the slow, cumbersome processes Excel perpetuates. Using Excel’s columns-to-rows math is restrictive. Greater flexibility is needed with modeling software.

Relying on Excel to reconcile budget numbers and bring business unit projections into alignment with corporate forecasts is a herculean task—rife with errors, broken formulas, and missed deadlines. By the time finance gets the numbers to match, they’re usually out-of-date.

Then there are time-consuming ad hoc requests. Who hasn’t had a CFO request detailed reports about revenue fluctuations or variances of planned-to-actuals by region, or expense increases due to higher healthcare premiums? In fact, 60% of CFOs say ad hoc analysis can take up to five days. Ultimately, ad hoc reporting is used to fill a gap in a company’s reporting process—a gap that can be filled with automated planning and reporting.

Excel doesn’t need to be replaced, however. Excel can augment automated planning. Used in conjunction with a cloud planning solution, it becomes one piece of a continuous, comprehensive, and collaborative planning process.

Barrier #2: Lack of alignment and collaboration

World-class companies know that organizational alignment on KPIs is a predictor of business success. Tracking performance against goals, ideally with targets set for the KPIs, and then flagging under- or over-performing business units monopolizes finance team resources. Finance is so busy with low-value but time-consuming tasks like balancing spreadsheets, fixing broken formulas, and nudging managers to submit budget requests, that they’re usually too swamped to steer overall financial strategy, let alone help facilitate and build collaboration.

Manual tasks hold finance hostage to mundane (albeit critical) processes, keeping data siloed and business decision-makers in the dark. Lining up behind KPIs is extremely difficult under these circumstances. These pockets of disconnected information keep decision-makers from effectively planning for what’s next.

And alignment around KPIs or collaboration under these circumstances? Not likely.

It’s not surprising that a majority of CFOs report lack of time as the biggest barrier to collaboration. Continuous firefighting and pursuing short-term priorities get in the way. When business processes become more efficient, however, collaboration is achievable. Productivity increases. Without alignment with KPIs, the disconnects between sales and operations, or production and management, or marketing and sales, make true agility impossible.

Barrier #3: Disjointed planning

By their very nature, resource allocation decisions need to reflect current circumstances—not the supply and demand challenges from last year and not financial reports that are three months old. Whether or not to hire more people, alter supplier relationships, invest in skills training, or accelerate capital investment plans largely depend on whether an organization plans effectively and agilely. And to plan effectively requires far more than a series of budget meetings and annual reports. It gets worse when different departments have their own set of numbers, revealing the need for a single version of the truth.

Disjointed and static planning flows from ad hoc information, missing data, and siloed decision-making. Active planning, on the other hand, helps organizations predict and respond quickly to potential gaps in performance and course-correct swiftly and agilely to changing market conditions.

But to do that requires a comprehensive and collaborative approach to planning that incorporates the latest information in near real time. In short, it requires active planning.

A way forward

The sought-after capabilities of agility—to see change coming, rapidly adapt to it, and turn uncertainty into business opportunities—can only be achieved by changing fundamental processes. Automating reporting so that it flows from multiple coordinated systems (ERP, CRM, HCM, etc.), generating reports in real time, and giving managers access to self-service reporting are all critical to an active planning process. Equally critical is to avoid digitally cementing existing processes that need to be redesigned.

While static planning produces monolithic plans that aren’t a true reflection of the business environment, active planning is different. It’s about listening to what your data is telling you about your goals, resources, suppliers, customers, competitors, and the wider market. Where static planning is top-down, siloed, slow, and limited, active planning is collaborative, continuous, and comprehensive. In other words, active planning allows you to plan and forecast at the speed of modern business.

By deploying a modern planning solution that enables active planning, your company can streamline FP&A processes, gain insights more quickly, and make better decisions faster. And be able to respond to change as it happens.

Don’t get stuck in the back office reconciling numbers and fixing broken links. Become a strategic partner by giving decision-makers access to the information they need with easy-to-use self-service reports, up-to-date data, and strategic insights.

Barriers to agility? With active planning, they’re easy to overcome.

Gary Cokins is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC. Gary can be reached at gcokins@garycokins.com

This blog post was originally published on the Workday Adaptive Planning blog.

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FP&A Done Right: Are you Ready to Start Analyzing Differently?

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This is a guest blog post from our partner Workday Adaptive Planning, written by Anders Lui-Lindberg. Lui-Lindberg’s blog post fits perfectly with our series’ theme of sharing insights on how the Office of Finance can change from traditional budgeting and “business as usual” to more agile, sophisticated practices.

 If there’s one thing a finance professional can do forever, it’s analyze stuff. We’re never short of data to analyze, and there are always more details to be ironed out. We love analyzing stuff so much that we almost forget the purpose of doing the analysis.

The purpose is to improve business performance through improved decision-making. That means that the analysis must produce an outcome that can be presented and discussed with business leaders. Too often though, we don’t get to that stage, and yet again finance falls short of making an impact.

It’s time to change the ideal of a good finance professional

I’ve often heard: “You can be the best finance professional in the world, but if you can’t communicate the results of your analysis, then it doesn’t matter.”

There’s only one problem with this statement. If you can’t communicate the results of your analysis, then you’re not the best finance professional in the world! In fact, in a disrupted finance value chain, you’re not much good at all.

I know this is a tough message, but we must signal to all finance professionals that doing analysis will soon be a thing of the past when algorithms and machine learning take over. Through these, we can get much deeper insights and at a much faster pace. Sure, humans might still need to put some finishing touches on it or spend a bit of time interpreting the results, but forget about spending days analyzing stuff in Excel.

Today when I ask finance professionals how much time they spend on the different activities in the value chain, “analysis” often hits 30%. That’s 30% on your own, behind a screen, doing analysis in Excel or some other tool. Granted, if in that time you can produce several golden nuggets of insight that can significantly improve decisions, then it might be worth doing. Most often we don’t though, and if you consider that an additional 35% of the time is spent on working data and reporting, then it leaves very little time to work with your stakeholders to improve their decision-making.

What kind of analysis are we really doing then?

So, what’s an ideal finance professional? We’ll uncover more of the answer in later articles, but building upon a week in the life of the business partner as pictured below, let’s look at how much time is spent on analysis.

It’s Monday morning, and the report landed on your desk as we saw in last week’s article, “Who’s running your reporting landscape?” You spend 15-30 minutes looking through the report to both ensure that the data makes sense and analyze the key developments. Through your previous dialogues with your stakeholders, you already know what’s happening in the business and therefore can much faster connect the variances to real business events.

You’re now ready for the weekly Monday meeting with your stakeholders. We’ll talk more about what happens there next week. On Tuesday though, it’s time to do some more analysis, but in a different way. Here you problem-solve with your stakeholders on how to improve business performance. You use a structured framework to consider your options and prepare a final recommendation to be presented on Wednesday. This could still take a full day or a day and a half, but as much as you’re analyzing your options, you’re also discovering insights and influencing decisions already through the problem-solving stage.

As you can see, this is a very different approach to analysis compared to what you’re used to. Instead of being buried in Excel sheets, you’re out there discussing real business problems with your stakeholders and together with them coming up with solutions. Those solutions, if designed and executed well, will bring tangible value to the bottom line of the company. Are you ready to start analyzing differently?

Anders Lui-Lindberg is a senior finance business partner at Maersk and the co-founder of the Business Partnering Institute. He is also the co-author of the book Create Value as a Finance Business Partner and a longtime finance blogger with more than 33,000 followers.

This blog post was originally published on the Workday Adaptive Planning blog.

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The FP&A Alignment Gap and How to Avoid It

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We buy new software solutions expecting that we made the best choice in technologies and service providers, and that we’ll get years of productive use out of them. And, we were right… at the time. Then, we ask ourselves, “Why are my users complaining that the software stinks? That performance is unbearably slow, or that it simply doesn’t work for them anymore?” It’s something we at Revelwood call the Alignment Gap.

When we first rollout our new software solution, it’s in perfect alignment with our business needs. We gathered our current business requirements and probably worked with a consulting firm or service provider to translate those requirements into the ideal solution. At the point of rollout, the gap between our needs and the solution is hardly visible. However, over time several things happen:

  • First, our business needs evolve. We enter new markets, make acquisitions and reorganize ourselves to address these changes. Perhaps we start to outgrow our original requirements.
  • Second, we start to tinker with the solution to make it work better for us. These one-off tweaks start to look like holes in the dam that we’re plugging without any overall plan on how it should all fit together.
  • Finally, the technology itself improves, but we fail to take a step back and figure out how we can take advantage of its new features and capabilities.
The FP&A Alignment Gap

These dynamics create an ever-widening gap between our needs and the solution we were once so excited about. The wider that gap is, the greater levels of dissatisfaction we experience from our users and by the organization as a whole. Eventually, we get to the point where nobody is happy, and users begin to trash talk the software itself, rather than how we’re misusing it. So, how do we keep the Alignment Gap as narrow as possible?

The biggest mistake companies make is that they don’t ensure an ongoing review and assessment of their software solutions so that an Alignment Gap never occurs in the first place. Imagine never going to the doctor for a check-up, but expecting that you’ll remain in perfect health forever. Imagine not bringing your car in for service periodically to make sure that you don’t break down when you’re out on the open road. It is critical to examine your software solutions on a regular basis to ensure they continue to meet your ever-changing business needs. And, you must invest in incremental improvements to reflect those needs and keep your solution current and relevant. These incremental changes will cost a lot less than the impact of low user adoption, unreliable results and the effort required to revisit the marketplace and invest in a whole new technology platform to solve the problem. Chances are, your current technology is not the problem… it’s how you’re using it!

Fortunately, Revelwood has a service offering for FP&A solutions that eliminates the  Alignment Gap. It’s called Performance Tune-Up and involves a thorough review of your solution at an appropriate frequency to ensure that it continues to operate efficiently and meets your changing business needs.

Don’t let the Alignment Gap erode the health of your FP&A operation. Talk to us today about our Performance Tune-up service.

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Alternatives to Traditional Budgeting

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Now that we have spent some time discussing several problems with traditional budgeting, let’s look at some alternate approaches. Here is a review of the first three problems from my prior blog:

  • Time Consuming and Costly
  • Quickly Irrelevant and Outdated
  • Financial Process Largely Disconnected from Specific Drivers

The biggest problem to me is the overall value (or lack thereof) that a traditional budgeting process provides the organization. The concept is sound. The execution is where the opportunity lies.

FP&A Done Right: Alternatives to Budgeting

One of the first steps is to determine the correct level at which to forecast. I’m referring to the number of accounts and entities (cost centers, profit centers, store fronts, functional areas, etc) you choose to budget. We often believe that more is more. In my experience, that is not true at all. Less is more. More detail means more time, not necessarily a better plan. There will always be puts and takes in your numbers as the year progresses and you compare actuals to budget. But if you build a very granular plan at the beginning, I have found that you end up with more misses. This is due to the budget review process where it is easy to look at the numbers through rose colored lenses. “The powers that be” make you bring every account or entity that is worse than prior year back to PY levels while keeping the goodness already baked in to other locations and accounts. You rarely get the offset so you end up with an unrealistic plan since we only take away one side of the equation.

Plan at the lowest level required for operational planning so you can get people, product, and capital in the right places at the right quantities. Your plan needs to be strategic in nature and should provide enough detail to allow for downstream capital planning. Don’t waste your time getting caught up in the weeds because the value add is simply to low. You must strike the right balance between detail and value to the company. As you spend time collecting numbers and assumptions for a given item, always ask yourself whether it provides actionable intelligence that will help you make meaningful decisions that drive the business forward.

As we learned in a prior blog, almost 50% of respondents stated that their business plan was outdated 1-3 months into the plan year. Wow!  Many of us spend several months on our plans only to have them become useless shortly after they are finalized. They become a variance column on our monthly reporting and then we just use it to see if we are on track for our bonus or not. If we agree that a business plan can still add value (which I do), then we need to find ways to shorten the amount of time it takes to complete.

One way that has multiple benefits is to make your budget driver-focused. Not only will this make the update process quicker, but it will help you connect your budget across all functions in your company. You need to ensure that your budget does not become a simple numbers game by aligning with operations, marketing, IT and others to build linkages throughout the organization, understand their needs for the upcoming year and create a shared vision that you are all marching towards. Choose the Key Performance Indicators (KPIs) that drive your industry and incorporate those into your planning process so you can quickly update your revenues and expenses. In my FP&A days, I focused on Rate per Day, Rate per Transaction, # of Transactions, # of Days, Transactions Per Employee, Average # of Vehicles, % of Revenue, etc. Armed with these assumptions, you can quickly update your budget when the need arises. Use these drivers to plan variable costs and then utilize a simple inflation factor to plan for your fixed costs. Here is a basic construct I have used successfully for many years:

(Rate * Driver) + Increment

The first part is clear. The increment is important because it provides the ability to plan for one-time items without having to artificially alter a rate to back in to the number. Without an increment or adjustment account, we lose the power of iteration as we can no longer simply update the driver because each rate needs to be reviewed as well to normalize it again for your starting point. Let’s say I have a particular expense that typically runs $100 (rate) per widget (driver). But I know that next month I have a one-time expense of $250 (increment). Using the above formula, I can easily increase my account by $250 to incorporate the one-time items. You can also use this to make last minute adjustments to your rate driven accounts without creating unrealistic rates.

While there are many changes you can make today that can help you avoid these pitfalls, we only had time to discuss a few here. We will look at a few more strategies in my next blog. As always, if you have some ideas to share or want to discuss further, please reach out.

Read more blog posts in Brian’s FP&A Done Right series:

FP&A Done Right: There is Life After December – The Fixed Forecast Dilemma

FP&A Done Right: Beware of Budgeting, Part I

FP&A Done Right: Beware of Budgeting, Part II

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FP&A Done Right: Beware of Budgeting – Part II

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How is your budget/budget prep coming along? Have you set aside time to rethink your process? In that last installment of FP&A Done Right, we started our enumeration of the problems with traditional budgeting. Before I discuss several more, here is a reminder of the last few problems:

  • Time consuming and costly
  • Quickly irrelevant and outdated
  • Financial process largely disconnected from specific drivers

Let me highlight more now and then we will move towards some alternative approaches.

Principled upon negotiating/gamesmanship

I can still remember my first visit to Corporate to review (or as I soon learned, to defend) our annual budget. Back then, I was fresh off my MBA and I had landed a job at one of our Region offices. We had just spent months building a plan from the lowest level, capturing input and feedback from every location manager and painstakingly describing every variance to the penny. We were ready. This was a done deal. Boy was I naïve. We were escorted into a nice room with a large table. Around the table I could see the president of our division and the heads of every major functional area ready to discuss our plan. Game on! My controller and I didn’t even get a chance to pull out most of the backup schedules we had created. He spent his time trying to negotiate fewer expense reductions and less revenue while I was busy taking notes on all the “savings” and “initiatives” the team had just found for us during the review. Great news. Thanks for the assist. I learned my lesson that day. After that, I knew that I had to pad my expenses and sandbag my revenue. They knew we did it too which is why they had us take a 5-10% cut in expenses as soon as we walked in the door. That is a difficult game to stop playing and, in the end, no one wins. Yet, many of us continue to play.

Triggers Unnecessary Spending

Since our budget numbers are frequently tied to prior year spend rather than being based on needs (a zero-based budgeting approach), we feel the need to spend money just so we have the same amount available to us next year. This is crazy, but I still see it today. We should be creating an environment where our front-line managers are rewarded for being fiscally conservative, not penalized. If you find a way to save money this year, we should be analyzing what you did so we can replicate it with your peers rather than giving you a hard time next year since you now have a large YoY increase.

Creates an inflexible performance contract

This is a big one as it impacts your managers directly in their bank accounts. This is especially true when incentives are tied to performance against the annual business plan. Once my budget was completed, I knew I would spend the rest of the year running actuals vs budget reports so we could determine what our bonus would be. If you remember from the first part of this blog, almost two-thirds of budgets are outdated between 4-6 months into the plan. If that’s the case, why are we using that number to determine the bonus for our managers? I want to reward my managers for changing course if they see something that is in the way of them achieving their goals. Compensate them based on what is occurring now, not what you thought was going to happen 12 months ago. When we focus on an inflexible budget number, we begin to manage to that number.  Don’t fall in to that trap.

Drives Wrong Behavior

It doesn’t take long before you know roughly where the year will pan out vs the budget. You know fairly quickly whether it is attainable or a long shot.  Since compensation is tied to the budget, it tends to drive the wrong behavior. You should expect your managers to do what is in their best interest. It is your job to ensure that by doing so, the company gains as well. If I am in the back half of the year and I already know I can’t achieve my annual budget numbers, where is the incentive for me to continue to find cost savings and improve my processes. I might as well give up on trying to get better this year because I won’t reach my bonus threshold anyway.  Right? Maybe I’ll push off a cost savings initiative until next year.  Or I’ll try that new revenue generating idea at the start of next year. The same is true if you have already maxed your bonus for the year. Why continue to do better? Save some of that goodness for next year. You need to make sure that the company goals are aligned with the individual goals. A budget can create a false sense of security and it may be holding the organization back from achieving its true potential.

It’s often easier to ‘see’ a problem when someone else describes it. My hope is that while reading this, you took some time to compare and contrast these issues with your methodology and approach to the budget. Does anything look familiar to you? If so, perhaps it is time to make a change.  Please reach out and share your stories with me. In my next blog, we’ll discuss some alternatives to these problems that you can begin using immediately.  Happy budgeting!

FP&A Done Right: Beware of Budgeting, Part I

FP&A Done Right: The Importance of Including FP&A Often and Early in Your Strategic Planning Process

FP&A Done Right: 5 Signs it’s Time to Rethink Your Process

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FP&A Done Right: Beware of Budgeting

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“Not to beat around the bush, but the budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, time, fun, and big dreams out of an organization. It hides opportunity and stunts growth.  It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity. In fact, when companies win, in most cases it is despite their budgets, not because of them.” – Jack Welch, former Chairman and CEO of General Electric

That is a pretty strong statement, but I bet many of you are smiling. You know, that uncomfortable smile you make when someone says something that hits a little too close to home. As an FP&A guy who has spent plenty of time building those budgets he’s talking about, that quote certainly speaks to me. He makes some great points though. Despite that, budgeting is still deeply embedded in our corporate culture. As you embark on the 2020 planning season, this is a good opportunity to rethink your process. Let’s examine a few of the problems with traditional budgeting.

Time Consuming and Costly

I’m preaching to the choir on this one. You know how much time and effort is spent on the budgeting process. There are typically multiple passes that include all levels of the organization, presentations to senior management where we “defend” our budget, and the thought that more is somehow better. More schedules, more pages in the deck, more passes, more reviews.  It’s maddening. We capture more detail than anyone could possibly know in the future and many of us still compile it using Excel (don’t get me started on that one…). It is difficult to get timely information that you can use to help build a reasonable budget.

Quickly Irrelevant and Outdated

Do you make it through half of the plan year with a relevant business plan still? If so, you are in the minority. I used to feel as if I was just going through the motions knowing that as soon as it was finalized, it was useless. It simply became a method to determine my bonus, not a method for driving the business forward.

Business Finance conducted a survey several years ago and they asked respondents to tell them when their current year’s budget became outdated. Based on my experience, these numbers still hold true.  Take a look at the responses:

28%:  Before the plan year begins

48%:  1-3 months in

67%:  4-6 months in

70-75%:  Before 2nd half of year

What are doing? Why do we continue this process?

Financial Process Largely Disconnected from Specific Drivers

How often are you building your plan with driver-based accounts? Are you starting with your line/operation managers and asking them what they can actually achieve next year? If you are, great! What I often see, however, is a disconnect between the P&L, oftentimes created in a vacuum, and operations. We talk about our plan in terms of YoY growth rather than focusing on the macro and micro indicators that surround us today. We build plans with months and quarters in mind while the business may be run by weeks or days or cycles. If you aren’t focusing on the specific drivers of your business, you risk creating an unattainable plan and you will spend the entire year making up variance analysis comments.

There are several other challenges with traditional budgeting that I’ll discuss in my next blog. Then, we will talk about alternatives to this and what our next steps can be. For now, just know that we can help show you another way. Decide right now that this will be the last traditional budget you do.  2020 is it!  Give us a call. We’re here to help.

FP&A Done Right: The Importance of Including FP&A Often and Early in Your Strategic Planning Process

FP&A Done Right: 5 Signs it’s Time to Rethink Your Process

FP&A Done Right: Creating a Shared Vision Between Finance and IT

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