As the final days of summer tick away, many organizations are beginning to think about their planning and budgeting for the 2018 fiscal year. What's your approach?
Is your organization still plagued by a long, detailed, and painful annual budgeting process? Do you spend most of the year explaining variances against a budget that was obsolete shortly after it was approved? If your answer to these questions is “yes,” then it may be time to embrace the concept of “continuous planning.”
This was the focus of a recent webinar sponsored by Host Analytics titled “Continuous Dynamic Planning: The CFO’s 2018 Mandate.” Hosted by Ernie Humphrey, the webinar highlighted the challenges organizations face in planning and budgeting for 2018. It also highlighted the best practices leading organizations are adopting to take a more dynamic approach that improves business agility.
Here’s a recap of the key points raised in the webinar.
Challenges in Planning for 2018
Organizations face key challenges in planning for the next fiscal year:
- New regulations, such as the upcoming changes in revenue recognition
- Potential changes in corporate taxes, regulation, and healthcare
- Global competition and shorter product lifecycles
- Increasing volatility in exchange rates, oil, and other commodity prices
- Exploding volumes of data to analyze
These challenges are putting new pressures on Finance to reduce reliance on spreadsheets and manual processes. There’s a need to adopt more dynamic planning techniques to improve the organization’s ability to adopt to changing business conditions.
There’s also increasing use of analytics and scenario modeling to leverage the large volumes of data being generated by internal systems, websites, social media, and other external sources. And then there’s increasing use of new technologies, such as cloud and mobile, to support anytime, anywhere access to information.
What Is Continuous Planning?
So what is continuous planning? The best definition I ‘ve seen comes from my friend Rob Kugel at Ventana Research: “Continuous planning uses technology to enable rapid planning and review cycles to support a more agile organization.” I would augment that with “rapid and frequent” planning and review cycles.
This is the alternative to managing the business based on static budgets – which are often obsolete by the time they’re approved. Then you spend most of the year explaining why actuals vary from a budget that was obsolete before – or soon after – it was even approved.
Some key techniques used in continuous planning are rolling forecasts and driver-based planning. Let’s take a look at these.
In their purest form, rolling forecasts allow organizations to project future results based on a combination of actual YTD financial results and the original budget, or updated revenue and expense forecasts for future periods. The future forecast period can extend to the end of the fiscal year. But in most cases, the rolling forecast period typically extends 4 to 6 quarters into the future. See example below.
The technique relies on an add/drop approach to forecasting that creates new forecast periods on a rolling basis. Businesses establish a set period, such as quarters or months, to update their forecasts. At the end of every period, a new period is added to the forecast, allowing businesses to regularly adapt their financial plans to reflect recent trends.
This approach provides organizations with the agility to re-allocate resources based on changing business conditions. It also provides the organization with a head-start on budgeting for the next fiscal year, since the work is done in advance, and considers the latest results and assumptions about the business going forward. In some cases, organizations that have adopted and executed a rolling forecast process have eliminated the need for an annual budget.
Another popular planning technique – one that often goes hand in hand with rolling forecasts – is “driver-based planning”. Here, instead of having managers budget or forecast every single line in their cost center budgets, the focus is on key metrics that drive other line items via calculations. So in the example shown below, we’re focusing on the number of employees in the cost center and the average annual costs for communications, computers, and office supplies.
From these drivers, we can calculate and forecast annual communications costs, computer costs, and office supply costs. Then, when analyzing budget variances, we can understand the true drivers behind the variances. In traditional budgeting, this level of detail is often not readily available, or it’s in some disconnected working papers. This technique is often used for other areas, such as travel expenses or even revenue forecasting. It saves a lot of time and effort in budgeting and forecasting.
Benefits and Business Impacts
So what are the benefits and business impacts of implementing continuous planning? Here’s what organizations that adopt these techniques typically achieve:
- Improved forecast accuracy (within 3-5% of revenue and cost targets)
- Improved agility – shorting budgeting cycles by 50% or more, same with forecasting cycles, doing this in a few days each month or quarter
- Optimization of resources – better allocation of resources to new opportunities
- Reduced reliance on annual budgets – less time, less detail, less costs, and sometimes elimination
This was borne out during the webinar by Rick Odom, Senior Manager, FP&A at Hill-Rom. The Welch-Allyn division revamped its budgeting process in 2010, adding quarterly rolling forecasts that extend out 18 months. This has enabled the division to shorten the annual budgeting process to 2 months, shorten forecasting cycles to 2-3 weeks, improve forecast accuracy, and spend more time on analytics.
It’s not too late to change! Don’t let your 2018 budget be a strategic anchor on your company’s ability to anticipate, respond, and react effectively to dynamic market conditions. Watch the webinar replay to learn how organizations of all sizes are transforming their financial planning processes by adopting continuous planning techniques.