Budgeting and forecasting

In today's rapidly evolving markets, the need for companies to react swiftly to the changing environment is essential. Reporting financial numbers alone is no longer acceptable. Reports should also include analyses and forecasts. Optimally, they should lead the way forward to achieve pre-defined goals.

Purpose for reporting is to communicate messages to specific audiences, but more importantly, the performance reports need to induce change and mark the start of corrective actions to ensure targets are achieved. Business analysis and predictive modelling solutions help companies to foresee the future, and thus support today's business decisions, closing the performance management cycle.

Making the right decision in such an atmosphere is easier when there is a clear view on what the future will bring. The future, however, may be predicted only from the moment when a good understanding of the past has been achieved; fast-changing business conditions call for agile planning, budgeting and forecasting.

Corporate Performance Management (CPM) is a set of processes that helps organizations optimize their business performance. Keyrus offers a framework for organizing, automating and analyzing business methodologies, metrics, processes and systems that drive business performance. CPM's business planning & control abilities help the company take corrective action in time to meet bottom line results. It is furthermore useful in risk analysis and predicting outcomes of scenarios and coming up with a plan to overcome potential problems.

KEY CONSIDERATIONS

The days of detailed, static plans and budgets that offer only an accounting view of the business are numbered. Volatility, uncertainty and risk dictate that companies develop a set of performance management practices that allow managers to identify, understand and model risk as a continuous part of their management process. The combination of best practices and state-of-the-art technology provides managers with the means to turn planning, budgeting, forecasting and risk management into key components of their ability to sustain profitable growth.

• Strategic planning

Developing a clearly defined strategy for agile and fast decision-making is essential in today's volatile and uncertain world. By employing the right tools and decision-making frameworks during the strategy development process, organizations can offer both flexibility and direction. Scenario planning and option evaluation can model a company's decision-making under different sets of circumstances, thus enabling fast, confident decision-making when an opportunity or threat comes up.

• Tactical and financial planning (budgeting)

A sound tactical plan allows for a well-constructed budget and enables:

• Clear assignment of responsibility for execution.
• Managers to take full ownership of both operational and financial plans.
• Confident decision-making about resource allocation.
• A set of measures that not only track performance, but also provide early warning of potential issues and opportunities.
• A direct linkage between operational actions and their financial impact.

Tactical plans and budgets therefore need to:

• Include contingency plans that allow the company to meet its targets under a range of future scenarios.
• Define the expected relationship between key business drivers (both internal and external) and expected financial results.
• Evaluate projects and initiatives based on both strategic fit and economic value.
• Identify the risk factors in all phases of the plan.
• Establish clear milestones and interim decision points.
• Be fully integrated with the reporting and forecast process.
• Balance the level of detail with the company's predictive ability.

• Forecasting

In today's fast moving and uncertain markets, forecasting is becoming the single most important management process. The ability to quickly and accurately detect changes in key external and internal variables and adjust tactics accordingly makes the leaders in the market. Effective forecasting should consider that:

• Forecasts must integrate both the external and internal drivers of the business as well as the financial results.
• Absolute forecast accuracy is less important than insight about how current decisions and future events will interact to shape performance.
• The number is less important than the assumptions and variables that support it - those are the things that should be tracked to provide advance warning of opportunities or threats.
• Detail does not equal accuracy with respect to forecasts -desire for detail should match predictive capability.

Best practice demonstrates that annual budgets may serve as a basis for estimating the required resources to deliver income and cost estimates within manageable ranges. These budgets are updated every quarter for the quarter ahead to reflect the best current information. The quarterly budgets are then further supported by 12-month rolling forecasts, which allow adapting resource allocations to volatility in the market.

Combining long-term direction with near term visibility and agility are guarantees an effective forecast process.

• The role of technology

Agile and risk-aware performance management systems are essential vehicles for companies to be able to promptly adapt plans and forecasts to changes in their markets or operating model, where spreadsheets simply cannot cope. They transform the role of the finance team to consistently and swiftly delivering high-value analysis, which allows managers to make much better decisions, much faster. The benefits may be considerable:

• Speed - budgets, forecasts and plans can be developed and consolidated across the company in minutes; management requests for focused analysis can be answered in hours.
• Accountability - business managers can see daily analyses of performance, flowing into monthly forecasts and annual plans. Managers use the tool to dynamically make changes based on the decisions made.
• Operational relevance - the integration of the company's key operational drivers into the financial representation of that business enables rapid model changes in projected revenues and costs based upon changing patterns and pricing, allowing operational managers in all departments to better optimize their own operations.
• Responsiveness - with rapidly changing market conditions, the finance team may run multiple scenarios looking at the relationships between operations, consumption, cost of goods, etc ... and thus optimize the company's profitability in the face of a material change in one of its key cost elements.

Using technology to focus performance management processes on the right details is a critical element of being able to effectively support a business operating in a volatile and shaky world.