Budgeting and forecasting
Avoid these seven pitfalls
Why budget and forecast in the first place?
We often hear from companies that the budget is already
outdated when it is approved and that the planning,
budgeting and forecasting (PBF) process is way too timeconsuming and resource-intensive. Furthermore, we
often see that the process is a finance-focused exercise
with little relevance in relation to managing the company.
According to Deloitte, the first pitfall is the lack of
common understanding of the purpose of PBF.
In the first place, as a company you should fully realise
why you plan and what the plans should be used for. Is
the purpose to execute the strategy, gain more cost
consciousness, improve decision support or other purposes? The rest of the PBF design follows from the
purpose.
When the purpose is clear, you should make sure that
you are in control of the following six pitfalls:
1.
2.
3.
4.
5.
6.
The strategy is not in place
Responsibilities and roles are not clear
Lack of business understanding
The models are not adjusted to the purpose
Lack of drive and simulation
Time horizon and frequency have been frozen
The value of a good PBF process
When you have a good PBF process in place, the value
will increase when planning becomes business-oriented
and is not a separate execution exercise in the finance
function. Credibility is increased when quality and punctuality are improved. The PBF process will be justified when
decisions can be made faster and in improved quality and
when there is an increased focus on future results and
activities rather than on historical data.
When the PBF process is also integrated with both the
strategy work and operational planning, planning will to a
much higher degree become a value adding activity – see
the figure on page 2.
PBF cycle
The PBF cycle is based on
the strategy, which is the
basis for planning. Subsequently follows execution
and reporting focusing on
the strategic initiatives.
Reallocations are made
based on analyses, which
will subsequently provide
input to the forecast.
1. The strategy is not in place
Honestly: Have your processes been aligned between the
strategy announcement and PBF? Is the strategy ready at
budget kick-off, and is it at a stage that makes it possible
for the business to clearly and precisely focus on executing on the right initiatives? Way too many company
strategies stay in the cloud. A strategy such as ”we are
going to have 5 percent top line growth” is not a strategy,
but an objective. The strategy is to tell how we wish to
achieve our objectives – which initiatives we prioritise to
carry through. The strategic initiatives are the entire
basis for our planning.
E.g., there is a large difference in acquiring new customers, retaining existing customers and giving priority to
test and quality rather than security of delivery.
Contacts
Christian Jensby
Partner
[email protected]
Mobile +45 30 93 59 28
Ulrik Linder Jakobsen
Partner
[email protected]
Mobile +45 30 93 50 15
Martin Lundbye
Senior Manager
[email protected]
Mobile +45 20 87 97 99
2. Responsibilities and roles are not clear
”I didn’t think it was my responsibility.” We have seen
that in a company’s planning, there are more versions
of, e.g., turnover because functional areas do not coordinate plans or they do not agree on who has the ultimate responsibility.
It also occurs that the process is carried through in such
order that subsequent parts of the process do not have
the time to wait for the previous parts to finish their
planning.
It is important to clarify order as well as roles and responsibilities – e.g. who has the ultimate responsibility
for the number of sold items to be true.
3. Lack of business understanding
”Why carry through the entire forecast exercise if the
update can be made on the back of an envelope?” There
is no reason to carry through re-budgeting in all areas
knowing that nothing of importance has changed. The
forecast should focus on the areas that have changed
significantly or have a special strategic focus, no more, no
less.
We often hear that the finance function is not able to
understand and be a sparring partner to the business
about its data and activities – there is simply a lack of
business understanding. PBF just becomes a repeated
execution exercise.
It is essential for a good PBF process that the finance
function is able to act as a sparring partner to the business so that the plans become more present to the
business. It is furthermore essential that the result of the
PBF process is a realistic expectation to the result and
not an expression of wishes and hopes.
4. The models are not adjusted to the purpose
”Planned sales per product number is important to me in
order to be able to plan production.” It is a typical error in
many PBF processes that one model tries to handle
everybody’s need for planning. Below are two essential
complications:
1. The finance function focuses on accounts and the
business on activities.
2. The sum of details in the individual detail models
becomes too comprehensive for one model.
It is fundamental for a good PBF process that the individual models are adjusted to the respective functions, but
without all details being drawn all the way up to the overall
plan.
In the overall plan, there is no room for all the local dimensions such as product numbers, customer groups,
campaigns, grades and details such as kilometres driven
per sales person, which the business needs to plan on.
This discipline requires that you fully realise what is most
important to simulate and measure on centrally.
5. Lack of drive and simulation
”To be able to make simulations and handle derived
effects is essential to us.” Many companies are not able to
simulate scenarios such as increasing support costs in
case of an increase in sales.
It is Deloitte’s experience that the use of drivers creates
great advantages – it provides increased transparency,
and it improves the use of resources in the PBF process.
The increased transparency comes from the fact that the
individual business units will be able to plan on the basis
of a number of activities (the drivers) times a value per
activity, e.g. number of support calls times an average
price or number of customer visits times average turnover. The improved use of resources will be a result of the
fact that it becomes possible to make adjustments on an
aggregate level, e.g. number of FTEs times an average
salary rate instead of having to get hold of all persons
responsible for the budget.
6. Time horizon and frequency static
In relation to the PBF period, it is again the market
conditions that set the framework – there is a large
difference in planning two years ahead within the telecommunications sector compared to the construction
sector. Other factors also play a part, e.g. investment
horizon, strategic initiatives, product types and market
conditions. It is good practice to plan the rest of the
current year and following financial years. This complies
with the finance calendar perspective and at the same
time provides the opportunity of current 12-month rolling
forecast.