IMPROVE AND SHORTEN YOUR PLANNING CYCLE Six Techniques for Optimizing Your Budgeting & Forecasting Process by Tony Ard Introduction The New Strategic Role of Finance It is both a challenging and exciting time to be in finance. Financial planning is no longer a simple financial forecasting exercise; instead, it has evolved into a more integrated financial and operational planning activity that touches the entire organization. And given today’s dynamic business environment, these plans are constantly changing. To stay competitive, organizations must be nimble and flexible, re-evaluating plans on an on-going basis to address emerging opportunities and threats. Finance leaders, in particular, are under more pressure than ever to find better ways to support their core businesses by managing uncertainty, volatility and risk. In this shifting paradigm, it isn’t surprising that so many organizations struggle with strategy execution – the process of translating strategy into actionable and measurable operational initiatives. Finance teams must shift time away from tedious data aggregation functions and spend more of it delivering value-added analysis, 2 Improve and Shorten Your Planning Cycle identifying trends and using analytics to advise business decisions that impact profitability. The volume and complexity of the financial and operational data that Finance must manage contributes to the increasing sophistication of models needed for strategic planning. So, how should we spend our time? According to a number of studies, the average finance professional today spends 40 percent of their time collecting and compiling data, 25 percent maintaining spreadsheets, 20 percent creating reports and 15 percent doing analysis and other activities. The best organizations look very different. They spend 10 percent of their time collecting data, and 30 percent doing analysis – yes only 30 percent. High-performing finance organizations move from analysis to a rich interaction with decision-makers, discussing what the analysis means. “What are the alternate scenarios we should focus on?” “What are the tradeoffs?” The best finance professionals tend to spend a great deal of time with the people and functions they’re supporting – as much as 40 percent. They truly become a trusted advisor facilitating the decisions that the organization should be making – focusing on operational information combined with financial data. Realizing the Benefits of Performance Management For many finance professionals, the annual budgeting process is an all-consuming process that is often outdated within months (if not weeks) of being finalized. There are few who relish the experience, as it is often characterized by long hours and vast differences between what executive management wants and line management can deliver in terms of future financial performance. In 2012, we asked 100 Finance personnel across the country a series of questions about their planning process. One of them, “How long does it take?” yielded a surprising result: more than 88% of respondents take at least one full business quarter to plan their budget for the upcoming year. While there is no question that budgeting & forecasting will remain a core function of finance, it is critical to integrate the process to broader organizational initiatives in a more flexible and seamless manner. Budgeting should be considered an ongoing and key component of a broad performance management process within the organization. The performance management process consists of the repeatable steps that are necessary to strategize, plan, This paper is designed to give you actionable insight to overcome some of the biggest hurdles to implementing an effective planning process whether it be long-range strategic planning, an annual budget or a rolling forecast (below). The end goal is to not only implement a best practice planning solution, but also to help you succeed as a trusted advisor to the entire organization in order to drive improved performance. Proven Methodologies That Work Best practices are often advertised as “silver bullets”. As Finance teams look to re-engineer inefficient and ineffective budgeting and planning methodologies and tools, they realize that one approach can’t be right for every organization. In reality, a ‘best practice’ planning methodology can’t really be hard-wired, and an optimal process is often a function of an organization's culture or even the competitiveness of their market. However, from our work partnering with clients, partners and industry thought leaders over the past 20+ years, there are certainly some common methodologies that have repeatedly emerged as critical for enabling a modern, flexible and efficient budgeting and forecasting process. monitor and analyze such that business professionals can both plan and execute in accordance with company goals. Unsuccessful performance management projects can often be linked to a failure to document the process inclusive of its deliverables. When departments are aligned and the desired process is understood, technology can be applied to complete the picture. Align rolling forecasts, multi-year plans, and detailed budgets Improve and Shorten Your Planning Cycle 3 Here are 6 budgeting best practices that we believe are applicable to the majority of medium to large sized organizations across industries: 1. Adopt a Driver-Based Planning Approach – driverbased and history-driven logic can help to seed the plan mathematically in alignment with corporate goals (e.g. growth factors) greatly reducing the amount of input required by a planner and ultimately helping to automate and shorten annual budgeting cycles. 2. Embrace ‘What-If’ Scenario Modeling – adopting a scenario-based approach to planning can greatly enhance the business management process for most organizations - whether conducting sensitivity analysis focusing on a key driver of the business or building more advanced, multivariate or initiative-based 6. Tie Operational Reporting to Strategic Objectives – effective financial performance reporting should be role-based giving each decision maker visibility into KPIs and metrics in context of their individual domains. Scorecards and interactive dashboards that provide automated alerts and notifications as well as a feedback loop to capture explanations and commentary helps ensure all stakeholders have visibility and accountability. The ability to perform efficient ‘drill-through’ analysis to underlying details can guide and direct corrective action. Optimize the Planning Process: 6 Proven Techniques scenarios. 3. Forecast on a “Rolling” Basis – many leading edge companies are moving to a rolling forecast model with flexible budgets and event-driven planning. Actual and monthly projections for “rolling” 12-18 month periods provide a trended view of performance, typically represented at an entity level. The model helps assess current realities that will influence longer-range (multiyear) projections, as well as detailed operational plans. 4. Deploy Initiative Based Planning & Tracking – establish owners, milestones, budgets and achievement goals for critical initiatives. Streamline the process of identifying, reviewing and approving new initiatives 1. Adopt a Driver-Based Planning Approach 2. Embrace "What-If" Scenario Modeling 3. Forecast on a "Rolling" Basis 4. Deploy Initiative Based Planning & Tracking 5. Streamline and Automate Data Collection 6. Tie Operational Reporting to Strategic Objectives and ensure project owners and contributors identify budget variances, highlight benefit achievement, and capture comments at any level. With workflow integrated in to the process, key stakeholders across management levels have complete visibility into the performance of various initiatives, improving organizational alignment. 5. Streamline and Automate Data Collection – improve the integration of both financial and operational information by automating data feeds, including manual data collection activities into a single data store so that all planning and reporting is based on the same metadata and ETL process enabling the delivery of consistent, trusted information. 4 Improve and Shorten Your Planning Cycle Now, let's take a look at each of these areas in more depth. 1. Adopt a Driver-Based Planning Approach For some time thought leaders in the performance management domain have been espousing the virtues of building financial models that incorporate operational data or drivers. Financials, as we know, are outcomes. And while they are certainly of vital importance – the ultimate score, if you will –they are by nature lagging indicators focusing on past performance. The activities or drivers that generate financial outcomes must be identified in order to understand and model the enterprise. They are, in modeling terms, the independent or predictor variables – the main causal factors that should be highlighted and leveraged in planning models. This assumption was recently validated by a survey we conducted with the FP&A departments of 100+ organizations where >60% of respondents cited operational drivers as a key component to their model. We have encouraged our own customers to import data sources beyond the general ledger into the Axiom EPM platform and to work with us to construct models that link operational data with financials. In healthcare, that typically means including all in-patient and out-patient statistics – healthcare revenue and numerous expense line items are directly tied to these statistics. In banking, interest income is really a function of balances and yields. Yields are a function of the general level of interest rates, spreads to those rates and the relationship between what is being paid down from prior periods and what is being originated in the current and forecast periods. Even simple unit pricing and unit volume statistics can be useful for modeling revenue streams. 4 key benefits of operational drivers The benefits of incorporating operational drivers are significant: 1. They enable organizations to design models that focus on the leading versus lagging indicators. Too often budget systems are constructed by keying in financial outcomes with no real insight into how those outcomes will be achieved. 2. They provide much greater insight into what’s actually going on in the organization. “Revenue was below plan due to lower sales volumes and deeper discounting than expected.” In this example, the plan had assumptions about sales volumes and avg. discount. All plan/actual reports can and should include not only financial variances, but operational variances as well. 3. They enable planners to evaluate alternative scenarios. No one knows the future, but a well-constructed driverbased model enables planners to understand and model the sensitivity to key assumptions. Our recommendation to clients: don’t take a single set of numbers to your executives and board. Present several scenarios (perhaps anchored around a base case), educating the executive team and the board about the sensitivity to key assumptions. It is one of the great value-added services you can provide to your organization. 4. They will increase the predictive accuracy of your forecasts and models. Once drivers are collected and incorporated into the business logic of your budget or forecast, one can back-test and tune the logic based on actual experience, improving the predictive quality of your planning model through time. Establishing the proper statistical relationships to adjust drivers to “flex” volume, workload, revenue and departmental plans is essential to efficient planning. Assumptions related to global volumes, reimbursement rates, inflation factors, labor rates and efficiency targets should all cascade down to “flex” revenue and expense plans. Driver-based and history-driven logic can help to seed the plan mathematically in alignment with corporate goals (e.g. growth factors) greatly reducing the amount of input required by a planner and ultimately helping to automate and shorten annual budgeting cycles. 2. Embrace 'What-If' Scenario Modeling The shifting sand underneath our feet is particularly problematic for planners. All too often organizations budget or forecast with one economic scenario in mind. Finance organizations often feel a great sense of accomplishment in Improve and Shorten Your Planning Cycle 5 completing “the budget” or “the forecast” without realizing they have focused all their attention on one potential 1 Driver Assumptions 2 Business Logic Layer 3 Collaboration, Inputs and Overrides 4 Scenario Storage 5 Scenario Presentation Baseline V1 V2 V3 ...Vn scenario. The concept of scenario testing is not new, yet it is surprising how few organizations actually implement it. In research we conducted earlier in the year, only 8% of the e.g. (Price * Volume – (Regional Discount Factor* Volume) * Shipping Fee) – Return % = Net Sales entities surveyed said they simulated alternative scenarios regularly. When we probed further with these 100+ organizations, to understand why so few were doing regular scenario analysis, we learned the following: WHAT ARE THE HURDLES TO SCENARIO PLANNING? Our model was never properly set up 45% We don’t have a good handle on our drivers V3 ...Vn 23% 14% Our budgeting is zero based 8% 0% 10% 20% 30% 40% 50% 60% It is encouraging to see that finance teams don’t view management as the impediment to performing scenario analysis. This makes intuitive sense, as management teams have a strong appetite for understanding sensitivities to their business. Ideally, finance teams should present not one forecast but several, highlighting expected performance under different operating assumptions. There are externally oriented scenarios that organizations can run focusing on changes like future customer demand, GDP, interest rates, housing starts, competitive price changes disruptive competitor offerings, etc., and there are internally oriented scenarios that might focus on new product offerings, pricing assumptions, changes in productivity, workforce growth/decline expectations, channel expansion, etc. However, to succeed finance teams must first overcome the most common hurdles. One of these is the false perception that it takes too much time. This can be a selffulfilling prophecy. In reality, scenario modeling does not need to be a time drain. Well-designed technology that’s coupled with the right data and modeling logic results in a great deal of process automation. Altering a driver assumption and processing a new scenario should take minutes, not hours or days. Most commonly it is deficiencies in technology, data and business logic that makes processing scenarios so time consuming. Get these pieces right and scenario modeling should be a fast and efficient process. 6 V2 54% We don’t have enough time Management hasn’t shown interest Baseline V1 Improve and Shorten Your Planning Cycle 1. Driver Assumptions: Well-constructed scenario planning models have identified the key drivers to the business (internal or external). Unlike spreadsheet models, these variables should be extracted from the business logic and stored independently so that they can be viewed and easily modified. The ability to clone and alter driver assumptions as versions is also critical. 2. Business Logic Layer: The interplay between driver variables and financial outcomes is the heart of any scenario planning model. The goal of the business layer is to define algorithms that best emulate the dynamics of the organization. It should be transparent so planners have easy access for the purpose of tuning their models. 3. Collaboration and Inputs: The results of any driverbased process typically require the ability of subject matter experts to review and make additional subjective judgments regarding expected results. The best scenario planning model enables robust computations but also allows users to make adjustments, giving stakeholders access and allowing them input to their respective domains. 4. Scenario Storage: After stakeholders have given their input, scenarios need to be efficiently stored in the model repository. Naming, storing, and retrieving scenarios should be straightforward for planners to manage. It is important that all data, metadata, user input, and calculations are stored for each scenario. 5. Scenario Presentation: The creation and efficient storage of numerous scenarios requires an equally competent approach to presenting the results. Whether in reports or dashboards, it is vital that side- by-side comparisons can be easily constructed including the key drivers along with the financial information, as well as narrative providing quick hitting detail. In order to get started and prove value quickly, we often recommend a single variable sensitivity analysis – the process of changing one variable at a time while holding others constant and quantifying the impact of that singular change. These types of scenarios are the easiest to process and represent a great starting place for the organization. 3. Forecast on a "Rolling" Basis Rolling forecasts are gaining in popularity and in some extreme cases are even replacing the annual budget process. Steve Player, North American program director at the Beyond Budgeting Roundtable and an expert on budgeting and planning, comments "In the old days, the CFO sat in the back of the ship recording what happened ... now, the CFO stands on the bridge looking forward and adjusting for variables." There are multiple factors driving this shift: • Time Considerations: For many finance professionals, the annual budgeting process is an all-consuming process that often takes at least one full business quarter to plan their budget for the upcoming year. As result, many finance teams essentially lose 1/4th of the year on managing the annual budget process vs. other value added analysis that can impact decision making. • Rapid Change: Often the assumptions on which budgets are based change even in relatively stable environments and are outdated within months (if not weeks) of being finalized. This makes most budget targets obsolete shortly after they are prepared. • Many CFOs want to spend more time managing the future instead of dwelling on the past, and adaptive organizations are using rolling forecasts to inform better decision making and organizational behavior focused on optimizing top and bottom line revenue on an ongoing basis. It is important to remember that the ultimate purpose of forecasting is to get the most realistic picture possible of the future for as far out as a company’s management can see. The business forecast should link short-term operational plans with medium-term strategic goals. Our recommendation for companies is to have a strategic, long-range forecast that spans at minimum 3-5 years. This long-range forecast should be updated at least annually. However, when forecasting for the next 12-18 months, it is a best practice to update or “roll” the forecast for future quarters after the close of each period. This approach requires a unique set of design considerations from both a process and technology perspective. Actual and monthly projections for 18 months provide a trended view of performance, typically represented at an entity level. The model helps assess current realities that will influence longer-range (multi-year) projections, as well as detailed operational plans. Organizational Behavior: Traditional budgets are often tied directly to individual department goals and employee performance evaluation and incentive processes. The result is a budget that is heavily negotiated to the lowest acceptable target. This can result in leaving more aspirational growth potential untapped (and unplanned for) and can also encourage inappropriate spending and discourage appropriate investment. Improve and Shorten Your Planning Cycle 7 4. Deploy Initiative Based Planning & Tracking Initiatives provide the ‘linkage’ to translate high-level strategy into actionable operational plans. A well designed initiative planning and tracking process achieves two key objectives: it establishes owners, milestones, budgets and achievement goals for each initiative and also serves as a mechanism for automating progress reporting across all stakeholders. Organizations should streamline the process of identifying, reviewing and approving new strategic initiatives. Users should be able to collaborate with configurable templates that guide contributors through required inputs that highlight the business issue, quantify any human and capital resources needed, and provide a forward-looking view of expected business benefits. • Evaluating and Approving Projects: Centralizing a repository of all capital projects benefits the evaluation teams who can then more effectively review and compare capital requests based on strategic ‘fit’, need and priority. This helps leaders achieve their goal of balancing their portfolio of approved projects across investments. • Consistent Method for Tracking and Reporting Project Progress: Another improvement initiative is to provide more consistent reviews of actual spend against approved spend for each major capital project. This monitoring function is supported by transaction-level financial reporting and, where appropriate, could include commentary to highlight milestone achievements on major projects by named project sponsors. Here are a set of key methodologies that enable successful initiative planning and tracking: Common Elements in Each Request: Standardizing the input form(s) associated with all new initiatives and capital requests brings structure and consistency to how proposed projects will be evaluated across financial and non-financial measures. Initiators provide data in their requests to define the core elements of the project in a consistent manner - project owner and sponsor, spend category (i.e., construction, IT, acquisition etc.), justification, capital needs (current and • future years), timeline and strategic goal alignment. Performance reviews should be initiated at regular intervals and technology can help to ensure project owners and contributors identify budget variances, highlight benefit achievement, and capture comments at any level. With workflow integrated into the process, key stakeholders across management levels have complete visibility into the performance of various initiatives, improving organizational alignment. Additionally, separately-modeled initiatives allow organizations to evaluate how directed efforts related to growth, cost containment or process improvement will (or should) impact functional departments. Workflow for Reviewing Submissions: All submissions should follow the same workflow and can be conditional, allowing for the automation of alerts and notifications to downstream approvers. As an example, large IT projects might need to go to IT and legal for evaluation before finalizing. In doing so, these ‘expert’ reviews ensure that each project is complete and • accurate before committee review. Initiatives What is the impact of various growth and cost containment initiatives Base Case Given current trends, what is our financial outlook 3-10 years? EXAMPLES INCLUDE: DRIVERS MODEL: 8 • Volume and Service Line Mix • Re-Design ER to Improve Patient Flow Thru • Payor Mix and Net Revenue • Expand Cardiac Cath Lab • Labor and Cost Rates • Expand OP Urgent Care Improve and Shorten Your Planning Cycle Scenarios To evaluate go-forward plans, what is the financial impact of different strategies? ANALYSIS CONTAINS: • Income Statement • Cash Flow • Balance Sheet • Key Ratios 5. Streamline and Automate Data Collection Architects of performance management solutions must make a series of fundamental decisions regarding data acquisition, storage and management. These decisions will have a major impact on an organization’s ability to efficiently and flexibly complete the budgeting process. Additionally, data collection methodologies can impact the level of trust that decision makers will have in downstream reporting. An optimized performance management process is best served by having a single database structure that is tuned to perform well for all performance management data types and activities, such as strategy development, planning (financial, staff, capital and sales), reporting, detailed variance analysis, profitability measurement, ad hoc analysis, and more. Using a simple example, this helps to ensure that employee data (relational payroll data source) and summary salary and benefits information (general ledger data source) can easily be brought together in a single report. A well-designed data model should include: 1. Support for string (text) and/or date fields – These nonnumeric data types are vital for modeling purposes. For example, this is evident in payroll modeling (hire date, job code, review date, employee name) and in capital planning (depreciation method and service date). The inability of cubes to store such data types is a clear hindrance to building a robust business model where these data types play an important role 2. Support for large data sets – Hospitals may want to analyze patient data, banks may want to generate cash flows for millions of loan records, and retailers or consumer goods organizations may want to plan at the SKU level. Well-constructed data architectures can accommodate these large data sets. 3. Scalability & performance –performance management architectures should provide near real-time response to any query. Cube-based systems are seldom near real time, given the need to “rebuild the cube” once leaf-level data is modified. The addition of new rollup structures, as well as historical data, tends to degrade performance of cube systems but has zero impact on 4. On-the-fly dimension updating – There are several use cases where on-demand dimension updating is required. The list of plan codes or dimension elements is not always completely predefined up front. For example, a planner might create a new strategic initiative that’s never existed before and has no prior identification or place in the database. There are many end-user scenarios where the data model needs to evolve “on-the-fly.” Performance management architectures should support the real-time insertion of new dimension members by end-users. Managing data in a single, powerful and flexible repository ensures it can be leveraged consistently across functions (aka, applications) in a trusted manner. This simplifies system administration tasks and promotes greater management buy-in as metrics and measures easily flow between systems (i.e. labor targets are consistent across plans and bi-weekly productivity reporting). While this sounds simple, certain types of planning use cases can prove challenging to back end databases and underlying data structures. Leading-edge companies make a concerted effort to design a back end data architecture that fully supports virtually ALL planning requirements. We recommend that report authors have at least two of these attributes in each published report. These capabilities are not separate or distinct, but rather must be integrated into the same process, based on the same data and – ideally – managed within the same technology platform. All of these plans must be kept in sync using the same assumptions to provide a holistic outlook in both the short and long term to support informed decisions. Ultimately, insight is only as good as the decisions that result. A finance professional’s job is not done upon delivery of a report, or even an analysis. It’s done when smart decisions are consciously made. The impact of effective operational reporting is a more sophisticated, holistic and dynamic view of the organization’s financial performance and strategy execution. Rather than simply reporting “the numbers” based on historic data, Finance begins to play a more strategic role offering deeper insights into the “drivers” of performance and profitability. well-designed relational architectures. Improve and Shorten Your Planning Cycle 9 6. Tie Operational Reporting to Strategic Objectives Add Intelligence to Your Reporting Below are seven attributes that enhance reporting intelligence: In well-run organizations everyone has a sense of the overall mission and how their respective role, however small, fits within the big picture. This is termed “vertical alignment” – the notion or idea that from the shop floor to the top floor, and every level in between, there is clarity regarding the goals and objectives of the organization and all the activities that surround it. Finance can be a key enabler of organizational alignment – as the custodian of the long range plan or the set of corporate KPIs and metrics. Finance also has an important role to play in translating the big picture into digestible initiatives, target metrics and plans to be consumed and enacted upon by the masses. Shared ownership and execution is critical. Too often the strategic plan’s final resting place is in shelved 3 ring binders or stale PowerPoint presentations; when in fact its fingerprints should be present in every operational plan and metric for the coming year. Reporting is more effective when outlier variances have an explanation or action plan associated with it. This improved feedback loop promotes greater accountability and visibility across all levels of the organization. 1. Relevance – Are the metrics, ratios and measures truly pertinent to the business and the report recipient? 2. Trends – Trends are real, budgets and forecasts are not. Trends deliver insight about what’s happening directionally. 3. Tolerance – Decide ahead of time what the thresholds are for when a particular trend should become an area of focus. 4. Early Alerts – Set the limits in advance so the system can automatically do the monitoring for you. One of the most valuable things performance management systems can deliver is time for decision-making; early alerts can help you do that. 5. Calls to Action – Allow decision-makers to focus on areas that require immediate attention. 6. Forecast Impact – Provide guidance as to the likely outcome if a particular trend is allowed to persist. 7. Additional context – Provide information on why a particular situation might be happening. For example, patient care may be dropping because of the greaterthan-expected use of contract labor. 10 Improve and Shorten Your Planning Cycle Summary About the Author We've presented best practices for various forms of Tony Ard is Director of Solutions Engineering at Axiom EPM. Tony has 20 years in the Enterprise Performance Management industry and is widely recognized for delivering innovative solutions with a focus on client satisfaction. Tony is involved in key software industry processes including development, solution management, field enablement, thought leadership, technical sales, partner management, and implementation consulting. He has delivered software systems for enterprise performance management processes from budgeting, strategic planning, capital planning, forecasting, and profitability management and has also developed business intelligence and business analytic solutions. planning such as the annual budget, rolling forecast and long-range plan, to not only help financial professionals be more successful in their role, but to facilitate the transition from the more traditional number cruncher role to trusted advisor guiding data-driven decision making. And finance teams that embrace this new strategic role require a technology foundation that is agile and flexible to support rapidly changing assumptions and business models, as well as providing a unified platform encompassing not only the budgeting, forecasting and reporting functions detailed in this paper, but related activities such as strategy management, capital planning, consolidations, profitability and cost management. Adopting these best practice methodologies can help you to improve and shorten your budgeting process and will also enable better decision making and organizational alignment that will help you to optimize performance. About Axiom EPM Founded by industry leaders with over two decades of experience in enterprise planning and reporting, Axiom EPM delivers performance management solutions for mid-sized and large organizations around the world. Solutions for budgeting and forecasting, reporting and analytics, strategy management, capital planning, profitability and cost management are delivered on a single unified platform. Axiom EPM embraces and extends familiar Microsoft Excel® functionality, allowing finance professionals to manage data in a familiar environment — while providing unmatched modeling flexibility and enterprise performance. Axiom EPM offerings include: • Budgeting & Forecasting • Reporting & Analytics • Strategy Management • Capital Planning & Tracking • Profitability & Cost Management • Consolidations Axiom EPM corporate office 10260 SW Greenburg Rd., Suite 710 Portland, OR 97223 toll free: 877.691.9969 | fax: 503.961.1176 sales: 503.977.0234 x115 email: [email protected] www.axiomepm.com • Dashboards & Mobility Axiom EPM™ is a trademark of Axiom Group LLC in the United States & other countries.