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Rolling Forecasts

FP&A Done Right: 3 Pitfalls to Avoid with Rolling Forecasts

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This is a guest blog post from our partner Workday Adaptive Planning, detailing three mistakes you don’t want to make with your rolling forecasts.

It’s not just meteorologists who can get forecasting wrong. If FP&A pros don’t take a thoughtful approach to establishing rolling forecasts, they can hit some unexpected stormy weather along the way. When that occurs, you run the risk of forecasts ending up, well, not being forecasts at all. They morph into updated versions of the annual budget as opposed to dynamic tools for creating visibility into the opportunities and challenges on the horizon.

Here are three pitfalls to avoid as you work to get the most strategic value out of forecasting and generate buy-in and momentum with your leadership team and business partners.

Pitfall #1: Don’t use the year-end as the stopping point

Let’s start with a driving analogy. Rolling forecasts should act like your headlights, providing steady and consistent visibility for what lies ahead. Too often, however, rolling forecasts become simply budget updates—which end up being the equivalent of driving so fast that the visibility provided by your headlights becomes increasingly limited.

The most common way organizations fall into this trap is by using the end of the year as a stopping point for forecasting. That may work in the first quarter, but by mid-year your forecast faces a hard stop in six months. And, of course, by the end of the third quarter you have a forecast that offers only three months of visibility.

When you’re forecasting with year-end being the stopping point, you’re just engaged in the process of determining if you are going to hit the year-end numbers that were established in the annual budget process.

The trouble with this approach is that it often encourages business partners to provide numbers and projections that are focused on “hitting the year-end numbers” as opposed to what is actually occurring in the business. With true rolling forecasts that don’t have an established endpoint you encourage transparency, because the focus is on assessing what is truly happening in your business and the market so you can plan and react accordingly. Not only that, but you can also generate a consistent long-range view to aid in better decision-making.

Pitfall #2: Know the difference between forecasts and targets

Forecast and targets are sometimes viewed as interchangeable. They’re not. In the simplest terms, a target is where you want to go, while the forecast continually tracks where you’re headed. In the ideal world, forecasts lead neatly toward your target. In the real world, a forecast represents the ever-changing dynamics of your business and the marketplace.

If you start viewing forecasts and targets interchangeably, you run the risk of facing mounting pressure to adjust the forecast to hit the target—regardless of other factors that might be cause for a course correction—or making decisions that help assure the target is still in your crosshairs.

If you separate forecast and target, you can then have much more robust conversations about what the business is doing to make the adjustments needed to where you want to go. That gives you a much richer, more robust planning conversation than you’d have otherwise. If you keep the definitions straight in your mind, you’ll avoid this pitfall, and really get to the heart of what you’re really planning to do and the risks you’re trying to run.

Making this distinction helps unleash the power of rolling forecasts. You can emphasize that the long-term focus is on the target, but that the nimbleness of a rolling forecast helps assure you will ultimately hit that target.

Pitfall #3: Don’t throw in the kitchen sink

With forecasts, it’s often best to keep it simple. The biggest problem often is that FP&A teams include too much information, thinking that, by putting more and more detail into the forecast, they can really nail it down.

In reality, adding too much detail leads to two pervasive problems that ultimately can undermine your forecasting success. First, it requires much more work for your FP&A team and business partners. Second, handling more data and information increases the chances that your forecasts will miss the mark or be error prone.

For example, the more drivers you include, the more things you must look at, the less time you have for analysis. So if you have hundreds of drivers, you’ve got to spend hours and hours—80% or more of your time—gathering up the data, leaving precious little time to do any real analysis.”

Some experts recommend the 80-20 rule: Aim to spend 80% of your forecasting time on analysis and generating insights, and 20% on collecting data. The only way to effectively do that is to simplify and only rely on the key drivers and data points that will 

This is a guest blog post from our partner Workday Adaptive Planning, detailing three mistakes you don’t want to make with your rolling forecasts.

It’s not just meteorologists who can get forecasting wrong. If FP&A pros don’t take a thoughtful approach to establishing rolling forecasts, they can hit some unexpected stormy weather along the way. When that occurs, you run the risk of forecasts ending up, well, not being forecasts at all. They morph into updated versions of the annual budget as opposed to dynamic tools for creating visibility into the opportunities and challenges on the horizon.

Here are three pitfalls to avoid as you work to get the most strategic value out of forecasting and generate buy-in and momentum with your leadership team and business partners.

Pitfall #1: Don’t use the year-end as the stopping point

Let’s start with a driving analogy. Rolling forecasts should act like your headlights, providing steady and consistent visibility for what lies ahead. Too often, however, rolling forecasts become simply budget updates—which end up being the equivalent of driving so fast that the visibility provided by your headlights becomes increasingly limited.

The most common way organizations fall into this trap is by using the end of the year as a stopping point for forecasting. That may work in the first quarter, but by mid-year your forecast faces a hard stop in six months. And, of course, by the end of the third quarter you have a forecast that offers only three months of visibility.

When you’re forecasting with year-end being the stopping point, you’re just engaged in the process of determining if you are going to hit the year-end numbers that were established in the annual budget process.

The trouble with this approach is that it often encourages business partners to provide numbers and projections that are focused on “hitting the year-end numbers” as opposed to what is actually occurring in the business. With true rolling forecasts that don’t have an established endpoint you encourage transparency, because the focus is on assessing what is truly happening in your business and the market so you can plan and react accordingly. Not only that, but you can also generate a consistent long-range view to aid in better decision-making.

Pitfall #2: Know the difference between forecasts and targets

Forecast and targets are sometimes viewed as interchangeable. They’re not. In the simplest terms, a target is where you want to go, while the forecast continually tracks where you’re headed. In the ideal world, forecasts lead neatly toward your target. In the real world, a forecast represents the ever-changing dynamics of your business and the marketplace.

If you start viewing forecasts and targets interchangeably, you run the risk of facing mounting pressure to adjust the forecast to hit the target—regardless of other factors that might be cause for a course correction—or making decisions that help assure the target is still in your crosshairs.

If you separate forecast and target, you can then have much more robust conversations about what the business is doing to make the adjustments needed to where you want to go. That gives you a much richer, more robust planning conversation than you’d have otherwise. If you keep the definitions straight in your mind, you’ll avoid this pitfall, and really get to the heart of what you’re really planning to do and the risks you’re trying to run.

Making this distinction helps unleash the power of rolling forecasts. You can emphasize that the long-term focus is on the target, but that the nimbleness of a rolling forecast helps assure you will ultimately hit that target.

Pitfall #3: Don’t throw in the kitchen sink

With forecasts, it’s often best to keep it simple. The biggest problem often is that FP&A teams include too much information, thinking that, by putting more and more detail into the forecast, they can really nail it down.

In reality, adding too much detail leads to two pervasive problems that ultimately can undermine your forecasting success. First, it requires much more work for your FP&A team and business partners. Second, handling more data and information increases the chances that your forecasts will miss the mark or be error prone.

For example, the more drivers you include, the more things you must look at, the less time you have for analysis. So if you have hundreds of drivers, you’ve got to spend hours and hours—80% or more of your time—gathering up the data, leaving precious little time to do any real analysis.”

Some experts recommend the 80-20 rule: Aim to spend 80% of your forecasting time on analysis and generating insights, and 20% on collecting data. The only way to effectively do that is to simplify and only rely on the key drivers and data points that will provide clean and accessible forecasts.

The end result will be rolling forecasts that you can readily create and update—and that your business partners can easily understand.

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

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FP&A Done Right: 3 Ways to Improve Collaboration with Colleagues Outside of Finance

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This is a guest blog post from our partner Workday Adaptive Planning, explaining how to improve collaboration between the Office of Finance and business managers.

Many companies suffer from poor communication and collaboration between financial and nonfinancial managers. Operating managers don’t have sufficient input or buy-in to the financial planning process, and they aren’t educated about how their decisions can influence overall profitability. For its part, finance isn’t able to offer real performance insights that might truly help managers improve their results.

Instead of working closely together to plan and forecast, finance and business resort to negotiations that can involve high levels of conflict. Why is this, and how can it be changed to strengthen collaboration between finance and the business—and therefore transform FP&A?

Drowning in metrics, measurements, and spreadsheets

First of all, companies sometimes flood managers with measurements and metrics, too few of which effectively help managers understand and improve their performance. Too much measuring can add cost and complexity to an organization.

Secondly, spreadsheets continue to dominate planning processes in most companies. While spreadsheets work well for individual productivity, they cause problems when it comes to sharing and aggregating. Finance gets bogged down in low-value-added work—such as formatting and troubleshooting spreadsheets—and can’t provide useful service to business managers.

Meanwhile, business managers waste time managing to budgets instead of managing their business. They often don’t get the information they need, when they need it, from finance. Instead, they’re deluged with data, metrics, and reports, much of which provides little value.

Furthermore, many planning systems are designed and implemented by finance and are seen as irrelevant by business managers. The result is lack of buy-in and enthusiasm.

Clearing the decks for useful analysis and true collaboration

Finance can make room for higher-value work for both themselves and managers by leading the way to less detail and complexity, simplifying internal systems, and reducing the amount of time managers spend producing counterproductive reports and analyzing too many measurements.

In so doing, finance can provide effective decision support and performance insight that can truly help managers improve their results, making finance a real partner rather than an adversary. Here are three best practices that will help you make these changes.

1. Continuous planning

First, replace detailed annual planning cycles, which take too long and result in a budget that is already out of date as soon as it is complete. A more effective planning system is a continuous process, focused on rolling views that look 12 to 18 months ahead. These continuous plans should enable managers to respond more rapidly to emerging events and trends and to changing business environments.

Replacing the annual budget with a rolling forecast can save huge amounts of work, freeing all managers to spend more time on value-added work. It will also improve the relationship between finance and business managers, as finance will have more time to provide better service.

2. Move from monthly variance reporting to KPIs and dashboards

Most companies manage through annual budgets and use monthly variance reporting as the primary feedback mechanism for managers. But monthly variance reporting is too slow and fails to reveal underlying causes of problems.

What is more effective is fast feedback of financial results, summarized and shown as trends and moving averages. KPIs should act as a management dashboard. They should provide managers with early warning signs when problems are brewing and action needs to be taken.

Defining measurements is just the first step. “The next step, and perhaps the hardest part, is to set in motion a cadence for the management team to know and really understand performance through KPIs so that they can use that knowledge to make the right decisions.

These KPIs should be few in number and appropriate to the level of management. A small number of key metrics should be reported daily and weekly. KPIs should provide a fast, high-level view of what is happening today and what is likely to happen in the short-term future. Moving to KPIs in this fashion will not only provide true value to managers but will also lighten the reporting load for the entire organization.

3. Deploy cloud technology that provides fast, relevant information, enabling collaboration

Finance can use technology to provide a performance management system that delivers what managers need—fast, relevant information. Avoid investing in complex IT systems that consume valuable time and money without providing reasonable value.

Instead, implement a dedicated system that employs cloud-based technology to enable unlimited numbers of managers to work together on driver-based forecasts, which are automatically aggregated at every level. This system should also have tight integration with data from other enterprise systems, so that it serves as the primary performance management system.

Why wait?

By implementing these three best practices, your finance team can transform itself and your company’s performance management practices. Your finance team can move beyond simply being effective at financial management and scorekeeping, and instead become a trusted and integral member of the strategic management team. And finance can offer real performance insights that can truly help your managers improve their results.

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

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FP&A Done Right: Volatile Business Conditions Require Agile Planning

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This is a guest blog post from our partner Workday Adaptive Planning, explaining how to lay the groundwork for business agility.

Manual, spreadsheet-based planning may have worked well enough in a more predictable age. But today? Not so much. Volatile conditions demand a smarter approach to financial planning and analysis (FP&A), and more and more finance professionals are discovering that legacy planning processes don’t let you go there.

It’s not that spreadsheets aren’t great—we love them. But, let’s face it, spreadsheets break down if you’re trying to rely on them systematically to gather data from across the organization, roll up departmental plans, or do complex, collaborative planning.

Even traditional market forces have proven challenging to companies relying on old-world technologies and approaches. Technological advances, ever-increasing customer expectations, and smarter, data-driven decision-making put pressure on finance teams to find new ways to operate with agility.

But how do you plan in a way that allows you to respond to such events, from the predictable to the unlikely?

The answer begins—and ends—with a modern approach to planning.

Why old-world planning is a disadvantage

The traditional planning models finance teams relied on for decades aren’t just a questionable choice in times of disruption—they can leave your business at a grave disadvantage. Businesses hampered by outdated planning processes are often left scrambling to react to changes while more agile competitors outpace, outperform, and outmaneuver them. Look around you: The companies that are performing well at this minute have pivoted—sometimes substantially—in a matter of weeks, sometimes days. Their business agility has become their defining attribute for success.

It’s safe to conclude that many of these agile businesses aren’t weighed down by manual, episodic, and siloed planning. Rather, they’ve likely embraced a more modern approach to planning—planning that’s collaborative, comprehensive, and continuous. These businesses consistently minimize risk, maximize performance, and create competitive advantages because their planning empowers greater business agility.

The difference between static and modern planning can be stark. Legacy planning tools are typically bogged down by versioning headaches and siloed, instantly perishable data. In contrast, modern, strategic planning models allow teams to broaden planning data beyond finance, pulling in real-time operational and transactional data fromERP,HCM, and other slices of the enterprise stack—all to make better, data-driven decisions quickly.

Laying the groundwork for business agility

As many companies recognized even before the current crisis, agility is a business imperative—and this more modern approach to planning is the key to achieving it. These three milestones will get you started on your journey to achieving a new way to plan.

1. Assess the status quo

Before you map out where you’re going, you need to understand where you are. Take inventory of the current state of your company, more specifically the business planning obstacles keeping you from implementing a more modern and streamlined planning environment. More than likely, these obstacles will pertain to people, processes, or technology, or some combination thereof.

Assessing where you are means getting granular.

  • What do your current business planning processes look like?
  • How long does it take you to create a budget? A forecast? An annual plan?
  • Where are opportunities for improvement?
  • Who are your planning stakeholders?
  • What technology do you have in place, and how well is it serving you?
  • What data challenges need attention?
  • What are the bottlenecks?
  • What could be automated that isn’t?
  • Are there any opportunities for automated data integration?
  • What are you lacking in workforce planning?

Answering questions like these will help you get a clear sense of what you’re working with and where you can improve.

2. Get organizational alignment

Being a change agent is no easy task. That’s why you’ll need to recruit a savvy senior-level advocate to help champion planning as a worthy and necessary cause. Along with your senior advisor, you’ll need a task force representative of other departments outside of finance, including operations, sales, and HR. Don’t forget to include IT to help you navigate technology needs and coordinate various data sources.

The next move is to align these key people with the business agility cause you’re championing.

How? Build a business case.

You can do this by quantifying the impact that the organization’s current status quo has on the company. What are manual processes and bottlenecks costing your business in time and money? What opportunities are passing you by? Conversely, what would those measurement strategies and KPI models look like if you implemented a modern, or active planning model? Try to unearth more nuanced ROI measures—for instance, how cutting budget time in half could give your people more time to run critical what-if scenarios—to really drive home the meaningful change that a modern agility planning model would bring.

Once your team is in place and your pain points recognized and quantified, you can map out a plan for your initial project. Consider focusing your initial effort on a function within finance so you’ll have control over the rollout. Develop a multi-phased plan that clearly communicates goals, a concise and actionable plan, and the key metrics for your KPI model. The ability to effectively communicate the why behind this initiative will help secure any executive buy-in you need for the how. A comprehensive and well-thought-out plan will go a long way toward achieving that.

3. Expand across the business

As noted above, there’s a strong case for beginning the rollout of your new planning model in finance and focusing on low-hanging fruit to bring early and easy wins. You’re motoring along, mapping projects, tracking and communicating progress, analyzing KPI reports, and making necessary tweaks. Once a rhythm and familiarity are in place, broaden your scope beyond finance. Initiate planning projects that engage HR, sales, or marketing. This is where you begin to extend the use and impact of modern, company-wide planning.

The key in this phase is to strengthen cross-departmental communication and collaboration. Don’t fall into the trap of relying on your technology or tools to do the heavy lifting. It will be easier to realize and maintain success with regular stakeholder one-on-ones, identifying lessons learned along the way, uncovering opportunities for more ingenuity and improvement, and communicating success and congratulations when they’re warranted.

Doing this will help elevate the role of finance to a strategic force within your organization by orchestrating planning throughout the business. Finance will no longer be known primarily for gathering budget numbers and issuing reports. Instead, your business will look to finance to drive the change and innovation needed to not only weather times of uncertainty, but to thrive in them.

These three pillars lay the groundwork for creating a more agile planning environment—one that will help you plan for what’s coming, whatever that may be. With this foundation and the insights we’ll share in subsequent blogs, you’ll be much better equipped to map your way forward into that tomorrow.

The bottom line

It’s never been easier to define the main driver of business success. It comes down to how fast your business can identify and proactively respond to change. But if your business is mired in static planning —characterized by long planning cycles, immediately obsolete plans, siloed efforts, and hard-to-find errors—it won’t be operating with maximum speed or agility.

This is doubly true in today’s fast-paced, data-driven world. Businesses hampered by outdated planning processes are often left scrambling to react to changes while more agile competitors outpace, outperform, and outmaneuver them.

Wherever you are on your planning maturity journey, the tasks here will help you expand and accelerate business agility by:

  • Creating a new kind of planning mechanism that’s distributed, inclusive, and optimized for your strategic objectives.
  • Empowering finance to continuously deliver insights that help the business course-correct. To power better, faster decision-making in ever-shorter cycles based on rolling forecasts and real-time (and eventually, predictive) data.

The truth is, building a continuous one-to-one alignment between your strategic vision and your operational reality isn’t easy. It’s something very few businesses can claim. You won’t get there overnight and you will face hurdles.

But it only takes a few small steps in the right direction before momentum starts to build. Before long, those steps will amount to a giant leap forward and significant competitive advantage as business agility accelerates exponentially.

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

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FP&A Done Right: Accurate Forecasting = Insightful Decisions

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This is a guest blog post from our partner Workday Adaptive Planning, explaining how great financial forecasts can guide business strategy.

If 2020 taught CFOs anything, it’s that they need well-executed financial forecasts and models from their FP&A team. Accurate forecasts help finance leaders make insightful, data-driven decisions, allowing their organizations to prepare for market conditions and trends, adapt to revenue and expense fluctuations, and execute strategic action plans.

So, if you’re interested in creating more accurate and reliable forecasts that can warn finance leaders when they need to make major changes, read on. You’ll learn how to create the kind of financial forecasts that guide business strategy.

Build an accurate business model

Before you can build a comprehensive financial forecast, you need to construct a well-designed business model. One way to do that is by modeling revenue. An effective revenue model should be able to answer questions like, “Which investments and actions are necessary to grow revenue by 25% next year?” Or, “If revenue remains flat, which programs should we cut to maintain profitability?” With the right model in place, you’ll have the flexibility to run scenarios and examine assumptions so you can answer these questions with confidence.

The purpose of revenue models is to forecast the sales volume and mix of products and standard service line offerings. They will vary widely based on your industry and business model. For example, a manufacturer might consider variables like capacity and utilization, while a law firm might look at client lists and billing rates. Whatever the nature of your business, the right model will help you get a better handle on revenue so you can drive your business forward.

Consider the money going out

In addition to the dollars coming in, your financial forecast will need to consider the money going out—expenses. Consider these key factors when modeling your expenses.

  • Personnel. This is likely your largest expense. If your organization is primarily salaried employees, you might forecast personnel expenses on a per-employee basis. If, however, you are a national retailer or restaurant chain with a large number of hourly employees, you may prefer to build a forecast based on work shifts or job roles.
  • Operating expenses. These are often tightly correlated with headcount. Your expense model should reflect that.
  • Cost of goods sold. You will need to forecast all costs associated with the delivery of revenue—including labor, materials, and overhead.
  • Fixed versus variable costs. Understanding what drives an expense is critical to getting the modeling right. A fixed cost (such as a data center) should be modeled in a way that it is not impacted by changes in revenue volume, while a variable cost (such as raw materials and packaging) might be modeled according to a formula (e.g., as a percentage of total revenue).
  • Overhead cost allocations. In some cases, you’ll want to trace and assign costs across segments or cost centers and possibly further to products, standard service lines, and ultimately to customers. Distributing IT expenses across multiple departments, for example, may help you understand the “fully loaded cost” of IT’s services to its various internal users. Begin by identifying “drivers” as the basis of your expense distribution. For instance, some overhead costs might be based on the number of customer orders or, for manufacturers, based on the number of material moves or machine setups. “Drivers” reflect the consumption view for how outputs consume expenses with a cause-and-effect relationship. (Activity-based costing is often used for this calculation.)

Get rolling with rolling forecasts

Once you’ve built your revenue and cost model, it’s important to define a frequency interval cadence and a calendar to recalculate the model. Financial forecasting is not a one-off exercise, but rather a practice to develop and refine over time.

By implementing a rolling financial forecast approach, you can revisit and update customer demand forecasts continuously based on actual data and performance to allow on-the-go course-correction as conditions and context change. Continuous forecasting helps you answer critical questions such as, “How are we doing against our plan?” and, “How should we adapt our plans and actions going forward?”

While some reforecasts may occur on an ad hoc basis, you should establish a consistent frequency cadence, whether semiannually, quarterly, or monthly. Each reforecast is an opportunity to assess performance and revise assumptions about the future. Your reforecasts can live alongside your original plan (and in some cases your annual fiscal budget) and represent your latest and best predictions of business performance and planned outcomes.

In some cases, you may need to generate forecasts on a much more frequent basis. Retail, hospitality, and other highly seasonal businesses may engage in daily or weekly monitoring to reflect customer shopping patterns. Other businesses may choose to do a flash weekly forecast around the product or service offering sales volume and mix or on other operational key performance indicators (KPIs) to ensure they remain on track.

Define your reporting process

Once you construct a comprehensive model of your business and incorporate your insights and assumptions into your financial forecasting process, you need to define a set of reports to be used (both internally and externally). Your reports should provide an easy-to-understand view of company health. They should include more than just a financial income statement and balance sheet view plus a pro forma net cash flow of your company’s finances. They should incorporate the monitoring of performance of both strategic KPIs and operational process-based performance indicators that you can easily share with your board of directors and management teams.

An efficient reporting process isn’t just about the reports you generate. It’s also about how you get there.

If you manage reports using only spreadsheets, then you’re familiar with the process of bringing together all your data sources, manually importing them into various spreadsheets, and emailing them around for approval. And that doesn’t even include the ad hoc requests you receive by email or from people passing you in the hallway.

The key to getting everyone the reports they need, faster and more accurately, is automation. An automated platform simplifies the gathering, reconciliation, extraction, and validation of your data. That alone can transform your reporting processes from a monthly hassle to a dynamic, ongoing influencer of organizational change.

Drive collaboration

So, you’ve automated your reporting. You’ve established a regular frequency cadence. And you’ve amazed your stakeholders with the insights you’ve shared. But if you’re still the gatekeeper of information, you may be missing out on a tremendous opportunity. When stakeholders are not directly involved in the planning process, they don’t feel a sense of ownership.

When data is accessible through self-service financial forecasting tools, people will be more likely to adopt a proactive approach to gathering critical finance data, and they’ll come to embrace your plan as their own.

Choose the right modern planning software

To help you take these steps, you’ll need the right financial forecasting tools. While Excel is where most finance teams get started, it’s not built for scale. As organizations grow and data sources multiply, organizations must turn to a cloud finance solution that can:

  • Facilitate collaboration. Get everyone in your organization involved in the planning process by giving them access to real-time data so business partners can take ownership of the numbers that they will likely be held accountable for.
  • Enable multiple what-if scenario planning. Combine high-level, top-down growth- and profit margin-based models with detailed, bottom-up personnel rosters and schedules in a single platform so you can quickly reconcile differences and address gaps.
  • Provide a single source of truth. With a core set of operational and financial data that’s common across the company, you can align the organization with the executive team’s strategy and monitor the organization’s performance in executing the strategy.
  • Automate reporting. With centralized reporting and automated data integration, you can eliminate the need to hunt for and manually aggregate data. That frees up more time to focus on analysis while providing stakeholders with the information they need to make better, faster decisions.

Financial forecasting comes down to answering a few key questions: How well can you understand your company’s position in the context of the economic environment? How much insight can you display into what’s driving opportunity and risk and causing problems? And perhaps most important of all, how ably can you communicate these insights to decision-makers throughout your organization? With the right financial forecasting tools, you can have all those answers right at your fingertips—and you can help every team member feel part of the process.

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

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FP&A Done Right: Rolling Forecasts for More Strategic FP&A

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This is a guest blog post from our partner Workday Adaptive Planning, written by Bob Hansen. Hansen makes the case for dynamic planning, which is better suited for complexity.

When it comes to FP&A forecasting, most companies base their long-range forecasts on static planning processes, rather than more relevant, dynamic plans that reflect the complexities of the business.

Relying on a forecast that doesn’t enable continuous monitoring of company performance, instead of implementing a modern, rolling forecast approach, is like using an old-school road map to guide you on a cross-country trip: Why use a paper map when you can get to your destination worry-free with a car GPS system?

Rolling forecasts—forecasts that are updated typically on a quarterly or monthly basis—can be a game changer. Especially today, amid a global pandemic. They allow organizations to better align with their strategy, perform more-effective business analysis, and derive greater ongoing value from their budgeting and planning processes. Rolling forecasts make organizations nimbler, able to seize potential opportunities, or better prepared for upcoming roadblocks.

Rolling toward a more strategic focus for FP&A

There is an increasing expectation that strategic guidance—which can be generated through rolling forecasts—emanates from the FP&A team. A CFO Indicator report affirmed that need. The survey found that CFOs expect that time spent by the FP&A team on strategic tasks will double by 2020—growing from 11-25% today to 25-50%.

Furthermore, CFOs are looking for their teams to develop the technical and strategic capabilities that support executing approaches such as rolling forecasts. According to the CFO Indicator survey, if the FP&A team could improve only one skill, 29% of CFOs want that skill to be dashboard design and report building, 25% want it to be predictive analytics capabilities, and 19% want strategic modeling of what-if scenarios.

Fortunately, with the increasingly user-friendly experience of dashboard technology, the skills gap is narrowing, which allows more FP&A teams to start instituting rolling forecasts.

FP&A … so little time

So rolling forecasts are a no-brainer? In theory, yes. Yet the near-universal challenge lies in freeing up finance teams to move toward this new approach. There is a significant gap between what CFOs want their teams to be doing and how they actually spend their days. Often-cited research by APQC shows that only 40% of 130 finance executives from very large organizations rated their FP&A capabilities as effective.

Further, our research shows that 75% of CFOs want their teams to have a significant and strong impact on their organization, yet only 46% expect that their team will have that kind of impact this year. The chief reason continues to be a lack of time for strategic planning.

The clear benefits of rolling forecasts

Despite these time-crunch challenges, the benefits of getting to rolling forecasts are clear. The APQC survey showed that organizations that use rolling forecasts are better aligned with unfolding business strategy, are more effective at business analysis, derive greater value from their budgeting and planning processes, and have more reliable forecasts than those that do not use them. The survey revealed that 94% of businesses that use rolling forecasts described their business analysis as effective. Only 50% of those that do not use rolling forecasts described their analysis that way.

Finance leaders need to clearly promote the many benefits of rolling forecasts and how they can directly impact business results. For example, you can produce a cash flow forecast at the end of a rolling financial forecast process—resulting in a consolidated balance sheet and an accurate view of cash flow for the entire enterprise. Getting C-suite buy-in helps pave the way to get the resources and time needed to develop relevant and robust rolling forecasts.

Moving to rolling forecasts is possible at organizations that have executive support and invest in new, cloud-based finance software. These solutions offer easy-to-navigate dashboards and scores of time-saving hacks that can free finance pros from transactional busywork and allow them to focus on more strategic activities that improve business performance.

Like a state-of-the-art GPS, rolling forecasts can go a long way toward helping you get where you want to go—and position FP&A to be a driver of the business, not stuck in the back seat.

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

Read more guest blog posts from Workday Adaptive Planning:

FP&A Done Right: Three Driver-based Budgeting Tips for CFOs When Change is Imminent

FP&A Done Right: Modernize your Budget Process to Anticipate Change

FP&A Done Right: Reforecasting in a COVID-19 World – Best Practices you can Implement Now

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FP&A Done Right: Five Tips for Budgeting in the Age of COVID

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This is a guest blog post from our partner Workday Adaptive Planning, written by Gary Cokins. Cokins explains why traditional budgeting is not a fit for the volatility, complexity and uncertain times businesses face today.

The pandemic is causing boards of directors and C-suite executives to take a new look at net cash flow. Traditional budgeting is simply too slow and too rigid to keep up with the rapidly changing business environment caused by COVID-19. There is too much volatility, complexity, and uncertainty right now.

Gone are the days when budgets could be one-and-done—tied to a fixed point in time and too inflexible to adjust to quickly changing business opportunities and challenges. In today’s world, a startup can be up and running and profitable in three months and disrupt its competitors. Consider Uber and Airbnb as examples. If your company takes nearly as long to create an annual budget, which is typically out-of-date a few months later, it will be extremely difficult to fight off the upstarts or keep up with your established competitors.

The solution? A flexible and continuous budgeting and forecasting process, often referred to as a rolling financial forecast, that helps you anticipate change and focus on outcomes rather than outputs and that is derived from the drivers to determine planned spending.

Here are five tips to modernize your budget process:

1. Just say no to one-and-done

Now more than ever, December’s fiscal year-end numbers often bear little resemblance to July’s realities—meaning budgets and forecasts must become more streamlined, accurate, and responsive. Annual budgeting won’t go away, but spending weeks and months processing data and reconciling spreadsheets that are out of date soon after the consolidated master budget is published doesn’t cut it anymore.

Modern budget solution:

  • Increase the frequency of budgets and forecasts to reflect shifting business conditions
  • Make decisions and plans based on data-backed insights rather than old and stale information
  • Change how resources, employees, and assets are allocated throughout the year and how the budget incorporates real-time opportunities and challenges

2. Focus on business drivers, not cost centers

Traditional budgeting focuses on allocating resources to cost centers, but business objectives (projects, products, and service lines) result from end-to-end cross-functional processes across the org chart. So if you determine the level of resources and spend based on forecast demand, then budgets and rolling forecasts can reflect performance that is company-wide rather than specific to a cost-center department.

Modern budget solution:

  • Enable organization-wide access to reports and data, allowing everyone to have visibility into the enterprise’s performance, including into individual departments
  • Review forecasts against budgets to eliminate confusion among competing departments
  • Provide real-time information for the needed insights to support better decision-making at all levels of the organization
  • Use drivers to determine the level of needed capacity (i.e., types and numbers of employees) to match your supply of capacity with demand

3. Create rolling financial forecasts

More than ever, fluctuating market conditions make accurate forecasts of future demand load (e.g., customer orders and sales) extremely challenging. Rolling financial forecasts help manage investments or financing determined by cash flow. They provide visibility into business performance using time horizons that reflect the speed of your business.

Modern budget solution:

  • Generate rolling financial forecasts that accommodate real-time shifts in market conditions
  • Enable self-service reporting so everyone in the organization can measure their performance against company-wide KPIs
  • Help everyone in the organization understand the downstream effects of their resource allocation decisions

4. Look forward, not back

Most budgets and forecasts are outdated before you push “publish” or soon after. And some factors are impossible to take into account (natural disasters, pandemics, broken supply chains, work stoppages). The rearview-mirror orientation of traditional budgeting (e.g., last year’s actuals create this year’s budgets) often results in increased “actuals” as managers exhibit “use-it-or-lose-it” behavior by spending needlessly to attain their prior fiscal year budget. Traditional budgets can’t keep up with the speed of modern business. One needs to look forward through the windshield.

Modern budget solution:

  • Respond faster to shifts in market conditions with real-time access to financials
  • Adjust outdated budgets and forecasts as change occurs
  • Move leadership discussions toward insight, planning, and action, rather than using the budget as a cost control mechanism to punish those with unfavorable cost variances

5. Use the right tools for the job

Creating a budget process that keeps up with the pace of today’s business requires a comprehensive, collaborative, and continuous planning platform—one that gives you robust, accessible reporting and modeling capabilities; dashboards with indicators and their targets that provide visibility into overall company performance; and automated tools that streamline budgeting and forecasting processes.

Modern budget solution:

  • Enable comprehensive planning that aligns the actions and priorities of everyone across the organization around common KPIs
  • Create opportunities for collaboration by giving everyone access to the data they need and deserve
  • Adjust and update budgets and forecasts on a continuous basis so you can navigate volatile market conditions in real time

Don’t let traditional budgeting lock you into outdated assumptions and fixed targets. Those outdated targets handcuff managers when the organization changes directions. Some managers view the fiscal year budget as a “contract” that they will not deviate from to minimize unfavorable variances from their allotted cost center budget expenses. This short-term focus jeopardizes the longer-term view. The modern FP&A professional knows the truth: Aligning budgets and rolling financial forecasts with comprehensive plans lays the groundwork for proactive rather than reactive planning—a significant strategic advantage in today’s highly competitive environment.

This blog post was originally published by Workday Adaptive Planning and appeared here.

Read more guest blog posts from Workday Adaptive Planning:

FP&A Done Right: Three Driver-Based Budgeting Tips for CFOs When Change is Imminent

FP&A Done Right: Three Words for a COVID-19 World – “Flexible Budget Variance”

FP&A Done Right: Planning for What’s Next in Uncertain Times

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FP&A Done Right: Traditional Budgeting is a Challenge

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This is a guest blog post from our partner Workday Adaptive Planning, written by Gary Cokins. Cokins explains why traditional budgeting is no longer adequate for most companies.

Traditional budgeting is simply too slow and too rigid to keep up with today’s rapidly changing business environment. There is great volatility, complexity, and uncertainty in the future. Gone are the days when budgets could be one-and-done — tied to a fixed point in time and too inflexible to adjust to quickly changing business opportunities and challenges. In today’s world, a startup can be up and running and profitable in three months and disrupt its competitors. Consider Uber and Airbnb as examples. If your company takes nearly as long to develop an annual budget, it will be extremely difficult to fight off the upstarts or keep up with your established competitors.

The solution? A flexible, continuous budgeting and forecasting process that helps you anticipate change and focus on outcomes rather than outputs. Rolling financial forecasts are emerging as a valuable planning method to augment the annual budget.

Here are five tips to modernize your budget process:

Tip 1 – Just say no to one-and-done

Now more than ever, December’s fiscal year-end budget numbers often bear little resemblance to July’s realities—requiring more streamlined, accurate, and responsive budgets and forecasts. Annual budgeting won’t go away, but spending weeks and months processing data and reconciling spreadsheets that are out of date soon after the consolidated master budget is published doesn’t cut it anymore.

Modern budget solution:
● Increase the frequency of budgets and forecasts to reflect shifting business conditions
● Make decisions and plans based on data-backed insights rather than old and stale information
● Change how resources are allocated throughout the year and how it incorporates real-time opportunities and challenges

Tip 2 – Focus on business drivers, not cost centers

Traditional budgeting focuses on allocating resources to cost centers, but business objectives (e.g., projects, products, service lines) are cross-functional with end-to-end business processes. By assigning resources to projects and processes, budgets and forecasts reflect company-wide versus cost-center specific performance.

Modern budget solution:
● Enable organization-wide access to reports and data that allows everyone to have visibility into project-level and process-level performance
● Review forecasts against project and process budgets to eliminate confusion among competing departments
● Provide real-time information for the needed insights to support better decision-making at all levels of the organization

Tip 3 – Create rolling forecasts

More than ever, fluctuating market conditions make accurate forecasts extremely challenging. Rolling financial forecasts help manage funds and provide visibility into business performance using time horizons that reflect the speed of your business.

Modern budget solution:
● Generate rolling financial forecasts that accommodate real-time shifts in market conditions
● Enable self-service reporting so everyone in the organization can measure their performance against companywide KPIs
● Help everyone understand the downstream effects of their resource allocation decisions

Tip 4 – Look forward, not back

Most budgets and forecasts are outdated before you push “publish” or soon afterward. And some factors are impossible to take into account (natural disasters, broken supply chains, work stoppages). The rear-view mirror orientation of traditional budgeting (last year’s actuals create this year’s budgets) can’t keep up with the speed of modern business. Look through the windshield.

Modern budget solution:
● Respond faster to shifts in market conditions with real-time access to financials
● Adjust outdated budgets and forecasts as change occurs
● Move leadership discussions toward insight, planning, and action, rather than using the budget as a cost control mechanism

Tip 5 – Use the right tools for the job

Creating a budget process that keeps up with the pace of today’s business requires a comprehensive, collaborative, and continuous planning platform—one that gives you robust, accessible reporting and modeling capabilities; dashboards that provide visibility into overall company performance; and automated tools that streamline budgeting and forecasting processes.

Modern budget solution:
● Enable comprehensive planning that aligns the priorities and actions of everyone across the organization around common KPIs
● Create opportunities for collaboration by giving everyone access to the data they need and deserve
● Adjust and update budgets and forecasts on a continuous basis so you can navigate volatile market conditions in real time

Don’t let traditional budgeting lock you into outdated assumptions and fixed targets. Some managers view the fiscal year budget as a “contract” with handcuffs that they cannot get out of to minimize unfavorable variances from their allotted cost center budget expenses. This short-term focus jeopardizes the longer-term view. The modern FP&A professional knows the truth: Aligning budgets and forecasts with comprehensive plans lays the groundwork for proactive rather than reactive planning—a significant strategic advantage in today’s highly competitive environment.

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.

Read more guest blog posts from our partner Adaptive Insights:

FP&A Done Right: What is Financial Modeling?

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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