As mentioned in my first blog post, there are five main challenges that face traditional FP&A functions today. I expanded on the first one , " ERP systems adapting to Big Data", in my last week's blog post. In this post I will be expanding on the process changes we need in planning, budgeting and forecasting to support the transformation through big data.
I read a great article by KPMG - "Planning, Budgeting and Forecasting: An Eye on the Future". It gave a good definition of what is planning, budgeting and forecasting.
Planning is defined as a top-down strategic activity that defines the strategic aims of the enterprise and high level activities required to achieve the goals of the organisation.
Budgeting is defined as an activity that enables resource allocation to be aligned to strategic goals and targets set across the entire organisation.
Lastly, forecasting is defined as an activity that tracks the expected performance of the business, so that timely decisions can be taken to address shortfalls against target, or maximize an emerging opportunity.
A company should do all three of the above activities to plan, implement and measure. With agile technology development , constantly changing technology and digitization the way we do these essential activities of planning budgeting and forecasting within FP&A needs to change. Today these are static activities - we plan in our strategic planning cycles for the next 3 to 5 years , develop a detailed budget for the next 1-2 years and forecast on a monthly or quarterly basis for the current year. But by the time a budget is developed and approved , it is already obsolete due to to the changes that have taken place in the market or within the company more recently. We then develop waterfall charts to explain the difference between plans, budgets and forecasts. A lot of the time of the FP&A analysts is spent in chasing down the data to explain these waterfalls instead or really digging into the insights from KPIs and partnering with business to take strategic decisions.
Many articles today are suggesting we should move to dynamic planning. Brian Kalish describes dynamic planning is his article " Dynamic Planning For A Dynamic World: Are You Ready For Change?" as " Dynamic planning enables companies to evaluate risks, seize new opportunities, adjust to new challenges, react quickly and properly to threats, adapt to changing technology, and make decisions that help it thrive" . Dynamic planning would still require long term goals to be set but it would allow the teams to revisit the ways that would achieve those goals in shorter time horizons. If dynamic planing is done with flexibility and agility to would allow companies to do course changes quickly instead of making big bang investments and then being forced to be married to it for some time. Rolling forecasts is another way that more flexibility can be added to the process of budgeting and forecasting. But in some industries or companies, long term investments have to be made which will require a long term risk taking and investment. For example , for a manufacturing company investment in a new site is a long term investment based on the current and future predictions of demand at a certain point in time. Once a commitment is made to do an investment, huge amount of capital is invested in it and it cannot be abandoned after 1 year because demand changed.
We know the current static process is not sustainable to the quickly changing technologies and availability of huge amounts of data, but we still have to plan for long term as well as short terms planning horizons. Changes to the current static process have to be made keeping in mind the needs of the industry. Balance has to be maintained in the processes to take into account quickly changing technology vs longer term investment such as in fixed assets or R&D.
I believe we need to understand and divide the budget into short term / dynamic variables vs long term / static variables. The short tern dynamic variables items should be reviewed on shorter time horizons ( monthly or quarterly) and regularly allowed to be updated to achieve the goals while the long term static variables should be reviewed on an annual basis to achieve the goals. This would require a different way to look at the P&L and balance sheet and partnership with the business in understanding the short term and long term decision making impacts. I call it the hybrid planning process.
Thank you for reading. Please leave your comments here or on linkedin. I welcome your feedback and comments.
I read a great article by KPMG - "Planning, Budgeting and Forecasting: An Eye on the Future". It gave a good definition of what is planning, budgeting and forecasting.
Planning is defined as a top-down strategic activity that defines the strategic aims of the enterprise and high level activities required to achieve the goals of the organisation.
Budgeting is defined as an activity that enables resource allocation to be aligned to strategic goals and targets set across the entire organisation.
Lastly, forecasting is defined as an activity that tracks the expected performance of the business, so that timely decisions can be taken to address shortfalls against target, or maximize an emerging opportunity.
A company should do all three of the above activities to plan, implement and measure. With agile technology development , constantly changing technology and digitization the way we do these essential activities of planning budgeting and forecasting within FP&A needs to change. Today these are static activities - we plan in our strategic planning cycles for the next 3 to 5 years , develop a detailed budget for the next 1-2 years and forecast on a monthly or quarterly basis for the current year. But by the time a budget is developed and approved , it is already obsolete due to to the changes that have taken place in the market or within the company more recently. We then develop waterfall charts to explain the difference between plans, budgets and forecasts. A lot of the time of the FP&A analysts is spent in chasing down the data to explain these waterfalls instead or really digging into the insights from KPIs and partnering with business to take strategic decisions.
Many articles today are suggesting we should move to dynamic planning. Brian Kalish describes dynamic planning is his article " Dynamic Planning For A Dynamic World: Are You Ready For Change?" as " Dynamic planning enables companies to evaluate risks, seize new opportunities, adjust to new challenges, react quickly and properly to threats, adapt to changing technology, and make decisions that help it thrive" . Dynamic planning would still require long term goals to be set but it would allow the teams to revisit the ways that would achieve those goals in shorter time horizons. If dynamic planing is done with flexibility and agility to would allow companies to do course changes quickly instead of making big bang investments and then being forced to be married to it for some time. Rolling forecasts is another way that more flexibility can be added to the process of budgeting and forecasting. But in some industries or companies, long term investments have to be made which will require a long term risk taking and investment. For example , for a manufacturing company investment in a new site is a long term investment based on the current and future predictions of demand at a certain point in time. Once a commitment is made to do an investment, huge amount of capital is invested in it and it cannot be abandoned after 1 year because demand changed.
We know the current static process is not sustainable to the quickly changing technologies and availability of huge amounts of data, but we still have to plan for long term as well as short terms planning horizons. Changes to the current static process have to be made keeping in mind the needs of the industry. Balance has to be maintained in the processes to take into account quickly changing technology vs longer term investment such as in fixed assets or R&D.
I believe we need to understand and divide the budget into short term / dynamic variables vs long term / static variables. The short tern dynamic variables items should be reviewed on shorter time horizons ( monthly or quarterly) and regularly allowed to be updated to achieve the goals while the long term static variables should be reviewed on an annual basis to achieve the goals. This would require a different way to look at the P&L and balance sheet and partnership with the business in understanding the short term and long term decision making impacts. I call it the hybrid planning process.
Thank you for reading. Please leave your comments here or on linkedin. I welcome your feedback and comments.
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