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Requirements for Budgeting, Planning and Forecasting

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A series of key business processes in successful business performance management (BPM) systems is planning, budgeting and forecasting. This area is well understood by people working in the Finance department, misunderstood and generally disliked by budget managers throughout the company and of little interest to everyone else. However, the team charged with identifying the ideal technology solution to support the company in this area needs a solid understanding of what’s involved.

First, there is some confusion around the terms planning, budgeting and forecasting. Although related, these terms mean distinctly different things and have different technology requirements as well. Let’s start at the top: planning. Most companies put together an annual plan that is part of the larger strategic plan of the company, usually covering three to five years. This is where the senior executives lay out their vision for the company at a high level. For example, they may show total revenues growing at 10 percent per year while expenses are shrinking at five percent per year and the margins are improving accordingly. These plans usually do not show the details of where the increases or decreases are coming from. In some instances, a more detailed version of the strategic planning process can include scenario modeling and what-if analyses. The plan is a way to share the intended future path of the company with investors, board members and management.

Budgeting is when the plan is brought down to Earth. In the budget, managers are charged with showing the details of how they intend to meet the goals of the plan in the coming year. In most companies, budgeting gets very specific, essentially having line items for every meaningful revenue and expense item, even tracking salary and benefit costs related to individual employees. In the first pass, the budget may be done on a quarterly basis, but it’s usually taken down to the monthly level before too long. As you would imagine, several passes are needed before the budget is finalized. There is an approval process as individual budgets are reviewed and consolidated upstream, but even with that, the consolidated company budget rarely ties out to the plan goals in the first several iterations. Sometimes, it is necessary to supplement this bottom-up budgeting approach with a top-down assignment of budget numbers to make it all work. In many cases, this involves allocating the total approved corporate expense for a particular item across several business units according to some formula. Once the budget is in place, it is intended to be the roadmap for the company’s spending for the next year. However, things change very quickly - for example, if revenue targets are missed and expenses need to be reduced accordingly, if revenues are exceeded and hiring needs to be ramped up or if things simply cost more than anticipated in the budget. That’s where the forecast comes into play.

The forecast leverages actual performance data as it is received to more accurately project where the company will be in the next period. Without changing the underlying budget, it is a way for the company to manage to current data and set realistic expectations. Forecasts are usually done at a level of detail somewhere between the high-level annual plan and the very detailed budget. There are several different approaches to forecasting. Some companies use models to generate the numbers, and others have senior managers enter their best guess. The frequency and duration of forecasts also vary. In some cases, companies may forecast the remainder of the year as each new month of actual data comes in. Other organizations may have a rolling forecast where they enter data for the next 12 months even as it crosses over year-end boundaries.

There are many technology implications for these important business processes. For starters, because most companies will spend time in each area of planning, budgeting and forecasting, the technology needs to support all three, ideally with a consistent interface and set of processes. For instance, if someone is familiar with how to budget in the system, they should be able to easily move on to forecasting when ready.

Now, let’s look at each area’s specific requirements. Planning is most closely related to strategic planning where a company sets its goals and objectives. The plan essentially quantifies the strategy. Some vendors deliver a separate strategic planning module to accomplish this. Others provide some of the basic capabilities as part of their performance dashboards. This plan is most often put together in a spreadsheet by senior management. Which brings us to one of the first major decisions regarding technology selection for budgeting and planning - what role should spreadsheets play?

There are three main schools of thought on spreadsheets. The first group (composed of end users and some vendors) says there is no place for spreadsheets in a performance management system. After all, aren’t spreadsheets the cause of most of the problems driving people to new systems in the first place? This group usually selects systems that have custom-built interfaces that may or may not resemble the spreadsheets people are used to. The second group says spreadsheets are great; we just misuse them, and besides, you’ll never pry them out of the hands of the Finance team. This group looks for systems that fully exploit all that is good about spreadsheets (including familiarity, built-in functions and formulas, formatting, existing models, etc.) but ties the spreadsheets to a central and secure database to take the chaos out of the equation. The third group is somewhere in between. They want a system that isn’t dependent on spreadsheets as the primary interface but is still able to directly import and export data to and from spreadsheets as needed. You’ll need to decide which group your company fits because this is one key area where vendors differ in their approach.

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