Streamline your budgeting process with modern financial forecasting

As we enter the last stretch of 2024 and start building our plans for 2025, I keep hearing from my clients that the "old" budgeting and forecasting cycle is too slow and time-consuming. They are looking for ways to make the process add more value and take less time, focusing on what matters most.

Some of the themes I’m hearing from my clients:

• The annual budget setting is too slow, and events are happening too fast.
• We need to focus more on strategic decisions that move the business.  
• We need to connect the organization's information arteries to facilitate the linkage between operations and finance.  
• We need to know things are changing sooner with more real-time operational signaling from the business.  
• Get more efficient by using automation (e.g., AI) and more intelligence to escalate important information sooner so that we can take action during the period.

Lay the foundation for modernizing financial forecasting before your next budget cycle  

If you are living through a challenging budget process cycle right now, here is my checklist for you to start thinking about how you can improve the process by this time next year:  

1. Use automation to forecast your existing book of business and get people focused on what they will do differently next year with actionable initiatives. 
2. Connect the organization with a modern tool and move away from spreadsheets - they are too slow to iterate, perform what-if analysis, and consolidate.  
3. Data is everywhere! Take the time to get access to daily/weekly operational data to inform your financial forecasts and build an early warning system for the business.  
4. Get a good platform you can grow and change with; modern planning and forecasting tools are easy to use, maintain, and adapt to a changing business and can help make the process of iterating and consolidating a forecast much easier.  

Let’s look at each of these checklist items more closely and learn effective planning methodologies to support your forecasting transformation efforts. For capital intensive organizations, you may benefit from Alithya’s Capital Portfolio Planning (CPP) solution. Alithya CPP ties together three processes for immense time savings: capital programming & budget setting, back office, and project execution.

Use automation to forecast your existing book of business

Organizations spend most of their planning effort thinking through their existing book of business, and while this is undoubtedly important to understand where you sit today, I find people spend too much effort here. This is an example of focusing on the wrong side of the 80/20 rule. In most situations, you should put the least effort into planning the existing run rate and the most effort into discussing how to bend that run rate through various strategic and operational initiatives.

When done right, your existing book of business, especially within gross margin, can be planned algorithmically with user driver-based and trending models and adjusted to account for expected macroeconomic elements such as cost inflation, market penetration, etc.  

If you can get a reasonable, explainable baseline, you can focus on discussing what business initiatives and strategic investments can materially bend your business activity levels up or down. Examples of initiatives include introducing a new product, entering a new market, launching a marketing campaign, or even holding a safety training program to reduce healthcare premiums.

I put this concept into an actionable framework. This 3-tier planning methodology is the foundation for a new forecasting process and mindset for the organization.

The three layers are:

1. Baseline – 20% of your effort - baseline represents a projection of your existing book of business using trends or drivers assuming business-as-usual.
2. Baseline Adjustments – 30% of your effort - baseline adjustments are due to macroeconomic factors like inflation, market penetration, customer attrition, vendor discounts, etc.
3. Business Initiatives – 50% of your effort - baseline bending initiatives that will have an owner and be tied to the leader's objectives, such as "introduce a new product" or "reduce utility costs by 5% with new AC units" or "fight vendor X for an additional 1% cost savings."

By designing a planning process using a methodology like this, you benefit from focusing people on thinking about the future, structuring their thought process to be systematic and consistent, leveraging your data to inform your plans, and elevating the discourse to the whys/hows of the plan.

Connect the organization for improved efficiency

Now that we have a good methodology in place, we need to think about connecting people together. In most organizations, the "planning process" is made up of hundreds of spreadsheets across sales, operations, marketing, HR, IT, and Facilities. If you operate in multiple countries or have many business units, you can multiply the number of spreadsheets by an order of magnitude.  

All these disconnected and human-managed spreadsheets slow down your planning process.  

How often does someone say "we need to change something” during a budget or forecast cycle?

A simple budget change or what-if analysis can take days or weeks to propagate through the business.

People trade emails, fight with spreadsheets, and work back and forth to make the update.  

Modern planning tools help streamline the interconnectivity between your organization's different functions and groups. Using a standard tool with a centralized database makes building a what-if scenario or changing a budget much easier.    

Changes made in one area automatically propagate to other impacted areas and can be reflected as a change in supply/demand that other impacted areas can think through. Getting a process like this going can radically simplify the budgeting process as it eliminates the overhead of spreadsheets and keeps everyone on the same page.  

It can seem overwhelming to connect the organization together, but like everything, you can’t boil the ocean, but you can start somewhere. I usually recommend the sponsor find a function or operational leader with a proven planning cadence that guides operations (e.g., how much to order, manufacture, sell, market, hire, teach, etc.) and partner with that function to bring spreadsheets into the connected planning technology. As you succeed in one area, take that success and find another leader who wants to improve their process, and move on.  

I caution everyone involved in building a connected planning process that you must understand that you are reinforcing a partnership between the top, middle, and bottom of the organization. C-level and FP&A benefit from a more straightforward and streamlined collaborative planning process, but the operational team also needs to get something out of the process. Operational teams need a process that adds value to their daily operations, providing better visibility into data, simplifying updates, and tying plans into operational applications. By properly engaging an operational team or function in a connected planning process, you can add value by making that team’s life better and their work more effective.

When connecting the organization, remember that this is a marathon, not a sprint! Getting it right and providing a capability that helps everyone involved is more important. If you shortcut quality here, the people you are trying to help will move back to spreadsheets, defeating the investment.

Use real-time operational data for improved agility and decision making

To build a modern 3-tier planning methodology and provide connected planning to your operational teams, you must integrate near real-time operational data into your planning process to provide the data to calculate your baselines and provide real-time alerting and intelligence if your business activity levels start to deviate from projections.

The typical approach is to use driver-based planning where you determine your key business volumes and rates and use them to generate a forward-looking financial projection. Traditional driver-based planning is a step in the right direction, providing a link to your operational volumes and financial statements. However, this approach lives by looking in the rear-view mirror, taking the last period’s volumes/results and using them to project forward.    

Wouldn’t it be great to know there is a change in business activity levels while there is still time to do something about it?  

If you can integrate real-time operational data into your planning process, you can see in real time and have time to react if the real world starts to diverge from your plans. With a modern planning tool, you can calendarize your activity levels to days or weeks and get more actionable information than from a monthly or quarterly process. Imagine the benefit if the organization can get an automated alert that “visits to our website were down last week” or “new account openings are growing faster than planned” and take advantage of the insights.

The trick with operational data is ensuring the organization isn’t overwhelmed with trivial alerts. One recent innovation in the software I implement is the ability to use machine learning to identify anomalies of predicted vs. actuals and allow tuning of the alerts to filter out the noise and focus the organization’s attention on critical items.

Get a modern planning tool!

You can apply these concepts using spreadsheets, but it’s much easier with a modern tool!  The technology I use is Oracle Cloud EPM Planning which is accessible in the cloud and can be set up quickly to provide a modular, scalable platform you can grow into with time.  

Oracle Cloud EPM Planning makes it easy to connect the organization from top to bottom, provide automated analysis into real-time operational data, and streamline the assignment of actionable items for your team to investigate. Here are some of the capabilities that make it possible:

• Web deployed - ability to quickly deploy up/down the organization from C-suite to front-line functional leader by opening a web browser.
• Modular with varying levels of detail - the ability to tailor the experience to each business leader’s data model, hierarchies, and measures while maintaining the mapping relationships to exchange data with applications and to be able to consolidate each area’s information. 
• Flexible connectivity - the ability to integrate data from any application within your organization and to be able to create standardized data mappings and relationships to make it easy to translate data into the planning process. 
• Automated forecasting - the ability to use machine learning and artificial intelligence to look at historical, multi-variate, and interpret data, incorporating recurring business events. 
• Built-in anomaly detection - the ability to identify anomalies such as statistical deviations in your operational activities and assign an alert to someone to investigate.

How do we get started with modern forecasting?

Rolling out a new forecasting business process that changes how your operational and functional groups interact with information and run their businesses can seem impossible. The good news is that our clients take this one step at a time, leveraging the modular nature of Oracle Cloud EPM Planning to roll out these capabilities logically over time and give each area the attention and care needed.

We recommend several elements to get started to deploy modern forecasting in your organization:

1. Create a phased business plan and roadmap that defines the overall business process and the order in which business teams will bring their spreadsheets into the planning platform.
2. Create a set of guiding principles we will hold to when defining the new business forecasting process that can be used as a North Star to make decisions.
3. Start small by finding a willing sponsor leader in one of your operations or functional groups with an established forecasting and reporting process and who wants to bring it into a modern tool to benefit from automation, machine learning, etc. Win with one area, and the others will follow.
4. For every unit of new process and technology being deployed, make sure you include an equal helping of communication (sometimes called change management) to explain why we are making these changes, how things will change for the better, and build excitement in the organization that what is coming is a good thing.

I love helping organizations think through their people, processes, and tools to define a modern forecasting process that adds more value up and down the organization and can be deployed methodically, practically, and cost-effectively. Contact Alithya if you’d like our help working through these concepts.