In the second installment of Apliqo’s new webinar series, our guest speaker Jack Alexander walks you through how to step up your budgeting and planning processes.
The problem with traditional budgeting
“Traditional planning models have a strong financial focus,” says Jack. “The big problem with this is that most managers see these plans as finance drills that don’t help them in any way.”
In these traditional planning and budgeting models, a lot of drivers and key takeaways are buried in detail. All the inputs are treated equal, and the plans typically take a lot of time to put together. Most importantly, traditional budgeting and planning models do not take uncertainty into account.
My career has spanned 5 decades going back to the 1970s, and I can never recall a time with greater changes and uncertainties than this day and age. That being the case, we simply can’t use the same legacy tools and traditional budgeting processes from years ago in today’s environment.
Jack Alexander
To help you step away from these traditional approaches to planning and budgeting, Jack suggests the following:
Jack Alexander’s top 5 budgeting and planning best practices
1. Put top-down planning guidelines in place
The first step in improving your budgeting processes is to put some executive planning guidelines in place to help with the creation of your upcoming plans and projections.
Traditional budgeting approaches are structured bottoms up, where a lot of the key data reflecting your company’s performance ends up being hidden in the details of your reports and budgets.
“Traditionally, we would ask people to provide detailed budget estimates which would be summarized in department summaries and finally fed into an income statement,” says Jack.
“One of the main problems with this approach is that it provides an almost exclusive finance perspective, rather than a comprehensive review of the company’s performance.”
To improve on this, Jack recommends using top-down budgeting in which the executive team together with the finance department puts together a high-level overview of the coming year as well as simple guidelines to help with future planning.
2. Use driver-based analytics
Another key aspect to better planning is identifying and focusing on your key business drivers.
Now, these drivers will obviously change from business to business. However, there are a number of universal drivers that underlie the performance of almost every company. These include:
- Revenue and margins
- Major cost drivers
- Macroeconomic factors
- Major investments
- Human capita
- Risk and upsides
3. Use rolling forecasts for a detailed business outlook
“The rolling forecast or business outlook is really a key element in developing a robust planning framework in today’s rapidly changing environment,” says Jack.
Unlike traditional budget statements or forecast models, the rolling forecast gives companies the flexibility to recast their outlook on the fly in response to changes in the business environment.
According to Jack, a solid rolling forecast must always:
- Have at least a 12-month forecast horizon
- Have a robust yet flexible forecasting model that can be changed on the go
- Explicitly call out the company’s key assumptions and business drivers (like those listed earlier)
- Offer a comprehensive review of performance
“The rolling forecast can really become the cornerstone of your projections because it can feed directly into your operational plan and also puts down the foundations of your longer-term projections,” says Jack.
Rolling forecasts also force your organization to identify trends as well as uncertainties in the coming 12-24 months and thereby gives your executive team the opportunity to deal with these advantages/challenges early on.
4. Leverage long-term performance projections
“When assessing long-term performance, what we’re essentially going to do is extend the forecast horizon, and that presents some unique challenges,” says Jack.
Unlike rolling forecasts, these long-term reviews have a horizon of 3-7 years, taking into account more risks and uncertainties than a 12-24-month outlook.
Because of their extended scope, these plans really offer a more comprehensive look into your company’s performance and give your executive team a “big picture” perspective. That being the case, long-term projections are extremely useful in guiding:
- Strategic planning
- Capital investment decisions
- Mergers/acquisitions
- Evaluation of the organization as a whole
Long-term performance projections need to be flexible, like rolling forecasts, so that your team can model different scenarios to reflect the effects of things like new acquisitions, products, or investments on revenue, ROI, profitability, and more.
5. Utilize scenario analysis for even deeper projections
“Scenario analysis is a plausible future narrative, or a story, impacting many variables across the organization,” says Jack. This type of analysis is extremely important given the economic uncertainty companies face today.
Unlike sensitivity analysis, scenario analysis doesn’t just change and gauge variations in a single variable (like revenue, for example). Instead, it contemplates a whole narrative (such as a recession, for example) and the various ways that might impact the organization.
“In the case of contemplating a recession, for example, a scenario analysis would take into account variables like unit volume, pricing, human capital turnover, compensation, and more,” says Jack.
Scenario analysis goes beyond most other planning tools and provides exceptionally deep insight into your company’s performance in various situations, helping to institutionalize an awareness of uncertainty and encouraging an open discussion of the many possibilities, both positive and negative, on the horizon.
Start planning better, today
With the right guidelines and drivers in place, adopting planning processes like rolling forecasts, long-term projections, and scenario analysis can forever change the way you review your company’s performance.
At Apliqo, we pride ourselves on helping CFOs and their finance teams be more effective. Make sure to join us for our next webinar on Preparing for and managing through business downturns on December 11th, 2019.
