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Related topics, 4 elements of an easy-to-build budget and strategic plan.
September 16, 2010
The budgeting process is on the horizon. You might be tempted to add (or subtract) 5 to 10 percent to prior years' numbers, call it a budgeting day, and focus your leadership strengths on running the business. A deeper but relatively quick evaluation of your business could be useful, not only to budgeting, but also planning strategically and growing profitability. Look at these four elements:
Think about changes that your business will be initiating in the coming year and those outside of your control. These might include:
- Launch of a new product line
- Entry into a new market segment
- Restructuring of pricing strategies
- Adoption of environmentally friendly and cost-savings practices
- Credit terms lengthened or shortened
- Government legislation, influencing addition of healthcare benefits
Study changes in a strategic planning session with your management team or during solitary reflection about your business direction. Project their impact on your financial statements, either before you begin the budgeting process or when you develop the budget.
Your approach to developing sales projections will vary, depending on the depth of your customer base and product lines as well as the structure of your sales organization. For example, if you have a handful of accounts that comprise 80 percent of your business , then ask your key account managers to project their sales or meet with these customers yourself to talk about their needs and buying plans in the next 12 to 18 months. If your customer base is much broader, then ask your field sales managers to prepare sales estimates; analyze trends and project sales associated with categories such as geography, industry, and referral source; or talk with a representative group of customers about their plans.
At the same time, identify sales drivers among your merchandise categories, core basics, trending SKUs and service offerings, including those services delivered electronically . If your product or service is a big ticket item, evaluate your sales pipeline. Marry your hopes for the coming year with results from prior years to develop realistic projections.
For cash management purposes, get a sense of when sales will happen and when you'll have cash in hand as a result of sales based on factors such as:
- Length of sales cycle
- Credit terms and average DSO
- Seasonal aspects of your business
3. Operating Expenses
Your business might budget expenses based on a well-organized, custom chart of accounts or simply reflect sources of income and expense deductions from a corporate tax return. Whatever you do, consider how various line items can be consolidated to get a holistic view of your business:
- Cost of goods (inventory) or services (freelancers, independent contractors) that are packaged and resold
- Cost of generating sales: advertising, travel, meals and entertainment
- Payroll: salaries, wages, employee benefits ( healthcare , lifestyle , and retirement ), workers' compensation insurance
- Facilities and equipment: lease of office or distribution space, utilities, equipment rental fee or purchase costs (if expensed, according to tax law), repairs and maintenance, property insurance
- Professional services: in-house and outside legal, technology, accounting, and other services
- Financial services: bank fees and interest on bank loans
Explore how sales and expenses are linked. (For example, are inventory plans lined up with sales projections; are marketing dollars allocated to visiting a key client; will going green save money on utilities; will new pricing strategies reduce sales volume but eliminate the need for contract labor; etc.) Make adjustments to synchronize finances associated with your business operations.
4. Strategic Expenses
Many of the coming year's expenses may position your company for future success but not directly influence sales, service levels, or the efficiency of your back-office operations. These may include costs of research and development projects, legal fees to apply for a patent or trademark, and startup cost of an e-commerce business.
If your company has just obtained a patent and forged a licensing agreement using this intellectual property, then make sure that you reduce legal fees compared to prior years and increase income associated with royalties. Similarly, if the e-commerce business has been launched, plan appropriately for variations in sales and expenses.
Ask the right questions
When I worked as a staff accountant for an apparel manufacturer, the controller told me that the outside auditors used faulty logic when judging the reasonableness of our year-end financial statements. The lead auditor routinely questioned large increases and decreases compared to prior years. A more pertinent question, according to my boss, would have been to determine why a certain expense item remained flat when the volume of usage had skyrocketed or when the sales that this expense activity supported fell dramatically. Get to know your business, uncover changes in revenue streams and expense structures, and then see if your financial statements (and budgets) mesh.
- Real-time data and analysis
- Collaborate and share
- Centralized Budgeting
- Forecast revenue
- Create multiple scenarios
- Automated hiring planning
- Plan for fundraising
- Founders and Small Businesses
- Mid-Sized Businesses
What is Strategic Budgeting? (How to Do it Right)
Budgeting is one of the most fundamental yet crucial aspects of running and growing a business.
The thing is, many startups are doing it wrong.
Okay, maybe “wrong” is a strong word, but they for sure could be budgeting a lot more strategically.
This brings us to the point of today’s lesson: strategic budgeting .
In this article, we’re going to discuss what strategic budgeting really means, and how it differs (quite a bit, actually) from simply pulling together a budget based on how much money you have available to spend.
We’ll also give you a comprehensive guide to building your own strategic budget, so you can put what you learn into practice.
What is Strategic Budgeting?
A budget is an estimate of incoming revenue and outgoing expenses for the coming financial period (such as the next month or year).
Strategic budgeting takes this a step further and is a way of creating a budget based on the overarching goals of your company.
It’s about more than just looking at how much money you have to spend, and then splitting it between departments.
With strategic budgeting, it’s much more about considering what you might be able to achieve with that spend, and analyzing different scenarios to build a spending allocation that best positions you for organizational growth.
Your company looks into the long-term when setting goals. To achieve these goals, you may need to implement new processes, purchase new software, or increase your resources. A strategic budget accounts for these long-term growth needs.
For example, if you’re a SaaS business or physical product creator, your business revolves around product development. Strategic budgets ensure product teams can allocate and attain more resources more wisely.
The best strategic budgets are based on three principles. They are:
- Focused on the long term
- Inclusive of contingency plans
Strategic Budgets Are Focused On The Long Term
Standard (read: poor) budgeting is based on the short-term.
It asks, “How much money do we have to spend next month” and bases decisions purely on that answer.
Strategic budgeting is long-term focused.
It asserts that you want your business to survive many years into the future (you do, right?), and asks, “What would be the best use of funds this period, based on the long-term organizational goals we’ve decided on.”
Strategic Budgets Must Be Flexible
Strategic budgets also should be built with flexibility in mind.
Founders and finance leaders know that in business, little goes according to plan. Even the best-laid budgets are subject to unexpected external factors.
The recent pandemic is clear evidence of that: many companies had to very rapidly pivot and adjust their budgets.
Obviously, such things are extremely rare and unforeseeable, but even on a small scale changes can occur that impact your budget’s feasibility (such as changes in local labor laws).
Strategic Budgets Include Contingency Plans
With all of this in mind, it’s a pretty wise idea to build a contingency plan or two when designing your strategic budget.
In the financial world, we call this scenario forecasting .
At a high level, you build out your strategic budget, then create upside and downside plans, which show how your spending might need to adjust if revenue is low, or what you can do with the extra cash if your revenue streams provide more fruitful than expected.
This process is a little outside the scope of today’s lesson, but to learn more, check out our complete guide on the subject: How to Do Scenario Analysis: Step-By-Step Guide .
How To Build A Strategic Budget In 8 Steps
Ready to get strategic with your budgeting?
Follow these eight steps to improve your financial forecast and create a budget that’s congruent with your long-term company objectives.
1. Decide Between A Top-Down or Bottom-Up Budgeting Approach
Top-down is the more widely-used form of budgeting. With top-down budgeting, your senior leadership has the power to design a budget.
They allocate top-line budget amounts for each department and sometimes go a step further and break that budget into specific line item budgets. In other cases, this is the responsibility of the department head, and senior leadership only provides the top-line numbers.
Bottom-up, as you’re probably guessing, starts the other way around.
Each department (led by the department head) figures out the costs involved in achieving growth goals for the next financial period. Senior leadership then signs off (with a bit of negotiation) on those budgets.
The advantage of top-down budgeting is speed. Senior leadership can create high-level budgets and assign more specific spend allocation to department heads.
However, it tends to rely on last year’s figures rather than the requirement for the coming years.
The bottom-up approach is essentially the opposite; it’s a bit slower, but it draws on the experience and expertise of those who are implementing the budget, and is less driven by previous financial periods.
You’ll need to decide on one of these two budgeting approaches before proceeding.
2. Gain Clarity On Your High-Level Goals
As we’ve already discussed, the thing that differentiates strategic budgeting from the regular approach is a strong focus on your organizational goals.
So, before you dive into the numbers, ask:
What are our main high-level goals for this financial period?
By the way, this should be more of an exercise of recalling and refocusing on those goals, not creating them (that is, you should have already set them).
3. Assign Budgeting Responsibilities
Now, decide who is going to be responsible for what aspects of budget creation.
For example, you might structure task allocation like this:
- Department heads – Responsible for creating department spend budgets
- CFO – Responsible for building the revenue aspect of the budget
- Founder/CEO – Responsible for approving the entire budget
4. Forecast Incoming Revenue
It’s generally a good idea to start by forecasting how much money you’re expecting to generate in the next year (psst, your cash flow projections are a great resource here).
This should include any funding or loans you’ve already received (if you’re still sitting on some cash) or are expecting to receive in the next year.
You can’t spend more than you have, so your total cash reserves set an upper limit for spending.
5. Estimate Costs
This is the other side of budgeting: expenses.
Start by calculating all of your non-negotiable outgoings. We’re talking expenses like:
- Rent and lease fees
- Wages and salaries
- Software subscriptions
- Interest payments
Then, add in what you might call your “growth spending.”
For example, let’s say one of your organizational goals is to grow new sales revenue by 50%, and part of your plan for doing that is to expand your sales team.
The cost of this team (their wages, as well as any costs associated with hiring, onboarding, and training), are part of your “growth spending.”
6. Build Multiple Scenarios
The best founders and financial leaders are those who are prepared for several scenarios.
Look, things don’t always go to plan (I mean, do they ever?)
This can extend from really small things, like only being able to hire four new sales reps when your goal was five, to huge economic, legal, and social changes that are out of your control and entirely unpredictable (ahem, pandemic, ahem).
Obviously, you can’t exactly prepare for the latter, but you can engage in a bit of crafty scenario planning to give you an easy Plan B (and C, and D), should things pan out a little differently than planned.
A good starting point is to create three versions of your budget:
- Baseline plan
- Downside plan
- Upside plan
The baseline plan is your budget if everything goes as expected.
Your downside plan looks at what you should do if revenue is down say, 5, 10, or 20% from budget.
Your upside plan does the opposite: it tells you how to allocate all of that extra cash if things go way better than anticipated (that happens too, you know).
7. Track Actuals Against Budgeted Figures
Strategic budgeting shouldn’t be a set-and-forget affair.
Throughout the month, you should be tracking your actual revenue and expenses against the budget.
This is what tells you if you’re on track (or not), and if you need to activate one of your upside or downside plans.
This step is a process in and of itself. Learn more in our dedicated guide: Budget vs Actuals (How to Compare & Analyze) .
8. Design A Plan For Regular Budget Reviews
While you should be tracking actuals constantly, it’s generally a good idea to set aside a specific chunk of time every so often to review your budget, perform a budget variance analysis , and make adjustments where required.
For annual budgets, this process should take place at least quarterly, if not monthly.
More often (so, monthly), is better for newer, more agile businesses, especially if you don’t have a huge history of budgeting (because you’re less likely to be accurate if you don’t have strong historical data to rely on).
You’re probably getting the idea by now that strategic budgeting is about much more than looking in the old bank account and figuring how much you can spend on what this month.
A great strategic budget will help you achieve your financial goals, and provide a way forward even if things don’t go exactly according to plan.
Managing this whole process without a robust financial reporting and forecasting tool is going to be painful, and, to be honest, a bit of a timewaster.
Check out Finmark today, and discover how our intuitive financial platform makes strategic budgeting simple, and helps you with important aspects like scenario analysis and variance reports.
Or jump right in and book a demo with one of our team .
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Historically financial modeling has been hard, complicated, and inaccurate. But financials are the lifeblood of any company. They’re too important to be ignored or outsourced. They should be a core part of every founder’s job. This doesn’t have to be scary. And you don’t have to do it alone. The Finmark Blog is here to educate founders on key financial metrics, startup best practices, and everything else to give you the confidence to drive your business forward.
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A simple guide to budget variance, 15 startup costs every founder should track, the ultimate guide to rolling forecasts.
6 Steps for linking Corporate Strategy to the Budget
Table of content
- Why budget?
- The role of budgeting in perfomance management
- Best of practices in strategic and operation planning
The process for linking strategy to the budget
Cause-and-effect visibility and role of technology.
- Why linking strategy to the budget make sense
- How TRG international can help
About TRG International
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The budget is supposed to be the tool by which an organisation transforms its strategy into action. Unfortunately, up to 60 percent of organisations do not link their corporate strategy to their budget. This paper will show you how to link these related management processes and strengthen your business performance management capabilities.
Ask any three people in an organisation why they budget and you are bound to get three different answers. They usually include such statements as, “It is something we do every year,” “It is a big stick we use to cane those who don’t perform,” and “It is the mechanism for setting the managers’ bonuses.” Is this really the intended purpose of budgeting? Consider the typical budgeting cycle.
It lasts four months—up to 25,000 person-days per year for the average billion-dollar company—and starts with senior managers asking the rest of the organisation to “guess” the financial numbers that they already hold for next year. That guessing is facilitated by a set of spreadsheets that are handed out to budget managers for completion.
Once completed, the spreadsheets are returned and numbers are consolidated, only to reveal that the budget managers’ guesses weren’t right. So the second round starts with senior managers asking budget managers to guess again. This time, the budget managers are now focused on what set of numbers senior managers hold and whether they can guess the right ones.
Strategy-the “how” of achieving the numbers-has been replaced by a numbers guessing game. If the organisation is fortunate, then senior managers will reveal their guess by doing a top- down pass to the budget holders who now have a great excuse for missing the budget: it wasn’t their guess. With this type of process in place, it is no wonder, then, that no one says they budget in order to direct the way in which their organisation will achieve its strategic goals the intended purpose of the budget.
According to data cited by Kaplan and Norton, creators of the Balanced Scorecard, 60 percent of organisations do not link strategy to their budgets. For budgeting to become the relevant process it was meant to be and can be, this gap must be fixed.
"Sixty percent of organisations do not link strategy to their budgets and this gap should be fixed."
The role of budgeting in performance management
The budget is similar to a car’s gearbox: it doesn’t work in isolation. A gearbox’s function is to transfer the power of an engine to a chassis so that the driver can move towards a predetermined destination. If the gearbox is designed without reference to the engine that will power it, the car won’t work and the driver won’t go anywhere. Similarly, if a budget is designed without reference to the strategies it is supposed to support and the resources available, the corporation will not move towards its desired goals.
Budgeting is part of a larger, closed-loop process called “performance management”. Performance management is a holistic approach to the way organisations direct and manage resources to achieve objectives. In the context of performance management, budgeting’s central role is to support execution through the allocation of resources to the activities that drive value.
Jack Weich (New York: Harper Business, 2005) suggests that budgeting can be a productive and “wide-ranging, anything-goes dialogue between the field and headquarters about opportunities and obstacles in the real world” if organisations concentrate on two questions: “How can we beat last year’s performance?” and “What is our competition doing, and how can we beat them?”
The answers to these key questions typically appear in a strategic or operational plan, against which budgets can be set and monitored for effectiveness. But if that plan is vague or incomplete, the resulting budget will not help the organisation implement its strategy.
Best practices in strategic and operational planning
Most organisations have plans. There is, however, a huge difference between a good plan and a bad plan. A bad plan, for example, is one that consists only of costs and revenues.
This plan provides no guidance for the organisation regarding how it is to achieve the revenue targets. There is no linkage between the highlevel goals and the day-to-day activities necessary to achieve them.
Performance management is all about managing the activities that generate results. Those activities should directly support the organisation’s strategic objectives.
Therefore, a good plan acts as a road map, showing the organisation how it should move from its current level of performance to the desired level of performance, based on the perceived economic environment.
The plan accounts for the activities, dependencies, assumptions, time scales, and resources necessary to support an overall strategic objective.
When one looks at best practices studies such as those conducted by The Hackett Group, an Answerthink company, and research reported in the book The Strategy Gap, eight planning best practices of high-performance organisations present themselves:
- Good plans answer key directional questions. Some are, “Where are we going?,” “How are we going to get there?,” and “What happens if things do not turn out as planned?” High-performing organisations do not assume that Plan A will always work. Instead, they prepare alternatives in case they are needed.
- Good plans typically address three activities. They are how the organisation will maintain current operations, how it will improve the effictency of current operations, and which new ventures or initiatives the organisation will implement. In this way, any change in performance can be assessed in terms of the type of activity.
- Good plans-and organisations-are focused. High-performing organisations do not plan in detail. For example, they may plan around 40 accounts compared with 220 accounts for the average organisation. More detail does not equal more accuracy. More detail does, however, negatively affect the time available for analysis.
- Good plans include all aspects of the business. In addition to detailing how goals will be achieved, good plans also describe how the organisation can continue to be effective and generate programs into the future. In Norton and Kaplan’s Balanced Scorecard methodology, these areas form part of the “internaI business process” and “learning and growth” perspectives. lnterestingly, this means that many of the measures within a plan will not be financial. Employee knowledge, customer relationships, and the culture of innovation may create the bulk of value for any organisation. In fact, this value can be as much as 75 percent of the totaI value of the organisation. This is perhaps the greatest reason why organisations cannot use their general ledger to collect and hold a performance management budget..
- Good plans link strategies to activities. Activities in a high-performing organisation are linked into a causeand-effect hierarchy (Figure 1) because the achievement of an objective is the result of doing the right things well. Activities as well as their impact on achieving strategic goals are monitored. By understanding these relationships, organisations begin to understand-and can build on-the true drivers of success.
Good plans are measurable
Objectives and strategies have measures of success, while activities have measures of implementation. In this way, the completeness of an activity can be correlated with the success of an objective. • Good plans include assignments for accountability. ln high-performing organisations, specific people are made responsible for individuaI activities. They are empowered, rewarded, and have control of the resources to ensure the deliver of the activity.
Good plans include the recording and monitoring of assumptions
High- performing organisations monitor a range of business assumptions that are tied to the targets set for corporate objectives. If the organisation discovers that their business assumptions are incorrect, they reconsider the associated plan targets and adapt accordingy.
Given the preceding best practices, it is obvious that the creation of a good plan requires far more than just collecting a set of financial estimates. To achieve a best-practices plan that is linked to a budget, use the following six steps: Senior Management (Corporate) Activities
- Define key objectives.
- Identify strategies and impact.
- Document assumptions. Operational Management Activities
- Develop tactics and high-level operational budgets. Management Review Activities
- Assess and mitigate risks.
- Check the plan for completeness and finalise it
Let’s look more closely at each one.
Step 1: Define key objectives
The first step, a senior-executive activity, is the setting of short-and long-term objectives for each portion of the strategic plan. ln Figure 2,the objectives are revenue growth and operating efficiency. Executives also assign a value (i.e., a measure) that denotes the success of each objective. Most organisations establish between five and seven of objectives.
Step 2: Identify strategies and impact
The second step, also for senior executives, is to describe the strategies that, when executed properly, will enable the organisation to achieve its objectives. For example, in Figure 2, the strategies for obtaining the revenue growth objective include maintaining the base (measured by number of distributors maintained) and achieving new sales (measured by revenue from new contracts).
Executives should assign and record the percentage weight (i.e., the influence) each strategy has on achieving an objective. The total of all strategies for a given objective must equaI 100 percent Team members use their experience and business understanding to assign the relative importance of each strategy. Next, the executive team should note which department(s) is responsible for implementing each strategy. The team also should determine how they will measure the success of each strategy.
Step 3: Document assumptions
Next, senior executives document the key assumptions and measures about business environment factors that could affect the organisation’s ability to successfully achieve its strategic objectives (Figure 3).
If the strategy is to control costs, for example, one assumption might be that inflation remains steady (the assumption) at two percent (the measure). If the objective is revenue growth, an assumption could be that the number of distributors remains the same in the coming year, whatever that number may be.
Step 4: Develop tactics and high-level operational budgets
- At this point, senior executives give the plan to the operational managers, who are responsible for implementing the documented strategies. For each strategy, operational managers must develop tactics to implement their part of the strategic plan. For each tactic they should record the following:
- A measure that will be used to monitor the implementation of the action.
- The weight (i.e., impact) of each tactic on achieving the success of the strategy.
- The person responsible for carrying out the action.
- The time scale being set (i.e., the start date and the duration, because not all tactics are of the same duration).
- The frequency of measurement (e.g., calls per hour, revenue per month).
- The type of activity (i.e., whether it is an activity for sustaining the business, improving the efficiency of an existing activity, or something completely new). This delineation will help to identify what kinds of activities are having the most impact.
- The estimated cost and revenue impact of executing each tactic. Look at these groupings (we’ll call these “variables” later on) such as salaries, material costs, equipment, etc. In Figure 4, the objective is revenue growth and the strategy is to maintain the base. Marketing is responsible for executing this strategy. The operational manager from marketing has recorded three supporting tactics: a communication program, a conference, and a loyalty program.
Step 5: Assess and mitigate
Risks Once operational managers have developed their tactics, the completed plan can be assessed. Ask the following questions:
- Is the plan realistic? Make sure that the planned tactics will really help to make the strategy successful. Is the plan affordable? Make ertain that the financial benefits will oweigh the costs.
- What risks do you run in implementing the plan and how can you negate those risks?
- How far will you let variances go before taking action? Setting up “best case,” “expected,” and “worst case” scenarios for each measure can help support those decisions.
- What alternative plans are there for overcoming the biggest risks? The organisation may need to create an alternate version of the complete tactical plan.
Step 6: Check the plan for completeness and fialise it
The last step is to come to agreement on the amended tactics and the costs/revenues assigned to each activity. Once completed, the plan can now serve as the starting point for a more detailed budget breakdown, if required. The high-level costs and revenues from the plan become budget targets.
You have a plan. You have a budget that supports it. Only one thing is missing: a way to easily view and analyse the cause-and-effect relationships beween all the plan elements and the resources that support them. This is a common complaint among senior executives who are responsible for managing and reporting on the execution of corporate strategy .
Technology often complicates the situation. For example, organisations typically create their strategic and operational plans using a word-processing application. The documents are owned and stored by a single user, cannot be easily updated to support the monitoring process, and have no analytical or version control facilities.
Similarly, organisations may use spreadsheets—still the most popular tool for collecting financial data—to create and maintain their budgets. Although spreadsheets are much easier to update than text documents and they may provide analytical capabilities, they typically cannot handle the “soft” side of the plan such as descriptions, comments, nonfinancial measures, and the impact of cause-and-effect relationships.
As a result, these documents do not provide a clear and visible way of showing how user activity is impacting both financial results and strategy. On the other hand, planning and budgeting software, usually part of a whole Performance Management suite, addresses all the shortcomings of the other planning and budgeting solutions.
Planning and budgeting applications help enterprises:
- Enhance collaboration through web-based access and central data reponsitory.
- Test “what-if” scenarios.
- Achieve financial goals by calculating impact of key performance drivers.
- Streamline tasks associated with budgeting, using automation and guided workflows.
- Maintain visibility with exception alerts and status monitor.
- Improve date integrity.
- Implement different types of budgets and plans, such as zero-based, historical-based and roling.
Why linking strategy to the budget makes sense
There is evidence to support the contention that organisations that focus on performance management outperform those who don’t. In a survey of 437 publicly traded organisations, those that had structured performance management systems (205) produced better results than those who didn’t (Figure 5 below).
Industry analyst group Gartner predicts that enterprises that effectively deploy corporate performance management (CPM) solutions to support a performance-driven culture will outperform their industry peers by 30% through 2015. Moreover, despite constrained budgetary environments, the CPM software market still recorded a 16.4% growth increase in 2011.
TRG International—a Gold Channel Partner of Infor—is an independent provider of IT business solutions, and supports thousands of users in 70 countries. Clients range from small domestic companies to large global multinationals in both the public and private sectors. Our activities focus on enabling business and people to perform better.
- Business applications solutions for accounting, strategy, planning, budgeting, retail, hospitality, ERP, business intelligence, golf and virtualisation.
- People solutions to select the right people and develop them to their full potential.
Why choose us for Planning and Budgeting?
We bring you a complete package—software plus services—to help you get the most out of technology:
- A market-leading corporate performance management system that adds value to your planning and budgeting processes.
- 24+ years’ proven success of implementation services.
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Planning and Budgeting Overview
Planning and Budgeting supports your strategic objectives by creating an interactive and collaborative planning and budgeting process. It enables companies to evaluate business alternatives, set financial targets, conduct scenario-based what-if analysis, prepare budgets, and adjust to changing economic environments. By delivering a shared business model with role-based access over the internet, every participant in the planning and budgeting process can interact with their portion of the plan or budget at any time, in any global location.
With Planning and Budgeting, you can:
Perform multiple activities such as line item budgeting, position budgeting, and asset budgeting.
Prepare, distribute, review, and approve budgets that use organization-defined time frames, account codes, and data field combinations.
Build control and oversight into the budgeting process through user-defined rules and formulas to model your way of doing business.
Use a responsive, driver-based methodology for developing budget plans.
Use the budgeting spreadsheet add-in to facilitate budget entry.
Interact with a role-based architecture, workflow-enabled for email notifications and approvals or rejections.
Leverage an intuitive, spreadsheet-like interface for budget analysis using the web-based drag-and-drop feature to generate planning and budgeting reports on assets, positions, or line items. You can interactively view and analyze these reports online using the analytic grid feature of the Analytic Calculation Engine (ACE) tool.
Use inquiry pages to generate reports against the data using the delivered SQR reports.
Reconcile top-down plans with bottom-up budgets.
Integrate data from Financial Management and HRMS.
You can also align budgets with all current and historical business data—PeopleSoft and non-PeopleSoft. Specifically, you can use Planning and Budgeting to create a complete planning and budgeting solution, aligning your top-down strategic planning with continuous forecasting and bottom-up budgeting. You can synchronize your budgets with your business plan, using your business plans as the foundation for your budget. In addition, you can easily compare actual results against budgets and plans, and then take action or adjust targets as necessary.
Planning and Budgeting is delivered within the PeopleSoft Enterprise Performance Management (EPM) product line, and it takes advantage of the Operational Warehouse. You first transfer the data from the Financial Management and HRMS systems into the Operational Warehouse Staging (OWS) tables using the IBM WebSphere DataStage tool. Then you use the ETL process to load the data from the OWS into the Operational Warehouse Enriched tables (OWE).
Note: Planning and Budgeting does not require use of MDW (multidimensional warehouse) reporting tables within the EPM Warehouse; however, Planning and Budgeting does use the same OWS data sources that are used for loading MDW tables.
Common Elements Used in Planning and Budgeting
- Admin & EIM
- BI & BW
- FICO & BPC
- CRM & Sales
- SAP PRESS Subscription
Strategic Planning, Budgeting, and Forecasting with SAP
Financial planning is a key activity for organizations of all sizes to accurately manage profitability and establish the company’s direction for the upcoming year and beyond.
A strong business planning process consists of sales and operations planning (S&OP), demand planning, financial planning, budgeting, and forecasting. All three of these planning elements depend on one another to achieve accurate integrated business planning.
Planning, budgeting, and forecasting involves activities at a number of levels, from high-level summarized strategic plans to detailed financial budgets and forecasts. Let’s take a look at each and what they mean for a company.
Strategic planning focuses on realizing a 3-5 year vision that addresses most critical market and organizational challenges.
An effective strategic plan translates your business strategy into a simple story about your organization’s future (see figure below). You know that story is clear when people around you understand what leadership has chosen to do—and not do.
Some key questions to ask during the strategic planning process include:
- What business are we in and how do we continue to compete?
- Which choices will make us more money?
- How will we align resources with our strategy?
- How will we measure our progress?
Budgeting is the annual operating plan that occurs once during the year and is not revised. A budget is completed for all quarters of the upcoming fiscal year (see below).
Generally, budgeting refers to the process undertaken prior to the start of a year to set expectations regarding anticipated results for the upcoming fiscal year. The budget creation process will provide accountability to revenue, operating expense, and cash flow targets by oftentimes linking certain elements of employee compensation to performance against targets set during the budget.
Some key questions to ask during the budgeting process include:
- How will we ensure accountability and encourage behaviors needed to execute the strategy?
- Should we leverage prior year actuals as a starting point for this year’s budget or should we leverage a zero-based budgeting method? In other words, should we create a bottom-up budget without using prior year actuals as a baseline?
Forecasting is a monthly or sometimes quarterly view of how business is performing against expectations. Closed quarters are generally populated with actual data as depicted in this figure.
While budgeting refers to the process undertaken prior to the start of a fiscal year to set expected results, the forecast updates that baseline budget throughout the year by taking actual performance into account. Adjustments to the baseline budget will occur each forecast cycle to accommodate actual results and shifting business conditions as the year progresses.
Some key questions to ask during the forecast process include:
- How can we adjust to reflect changing conditions in order to meet or exceed our budgeted expectations?
- How often should we re-forecast in order to drive business decisions effectively (i.e.: monthly versus quarterly forecast)
How Does Planning, Forecasting, and Budgeting in SAP Address Key Challenges?
With the introduction of SAP Business Planning and Consolidation (BPC), version for SAP S/4HANA and SAP Analytics Cloud , companies are now able to address several of their key challenges through the implementation of the latest SAP technology, supported by the appropriate business process changes.
SAP BPC, version for SAP S/4HANA resides within the SAP S/4HANA server, which streamlines the data integration process by serving as an extension to the core ERP, without requiring a separate database or instance.
SAP Analytics Cloud is a cloud-based planning, reporting and analytics solution, which provides native integration to SAP S/4HANA and can source data from various source systems.
In order to understand the key benefits of the SAP planning solutions let’s take a deeper look into how they can help address some of the key budgeting and forecasting pain points discussed earlier.
With the evolution SAP BPC, version for SAP S/4HANA, SAP Analytics Cloud, and SAP BPC 11, organizations can now mitigate many of the key challenges previously discussed during the planning, budgeting, and forecasting process.
Some of the key planning, budgeting, and forecasting challenges SAP can help mitigate
Reduce Budgeting and Forecasting Cycle Time
Through improved data integration, budgeting and forecasting cycle time can be greatly reduced. The budgeting and forecasting cycles can often times take longer than expected when companies do not have a central planning system that collects all of the data from various source systems required to create their forecast. SAP BPC, version for SAP S/4HANA integrates in real time with the ACDOCA table which stores all of the FI and CO data from SAP S/4HANA. The ability to read data directly from the ACDOCA table eliminates the need to load and replicate data from the general ledger to the planning systems.
This is a tremendous benefit to the business as it eliminates the need to wait on long data load times and it enables real time planning, reporting, and analysis. Planners can now spend less time waiting on data and more time analyzing the data, leading to shorter budgeting and forecasting cycles.
Improved Forecast Accuracy
Both SAP BPC and SAP Analytics Cloud provide standard input templates, reports and calculations which can enable top-down and bottom-up planning. By leveraging standard content and technical concepts such as FOX code, predictive models, and SAP HANA stored procedures, complex planning models can be developed that will read large volumes of data in real time to provide accurate forecasting results.
Enhanced Reporting Capabilities and Data Analytics
To facilitate data-driven business decisions, SAP has enhanced reporting capabilities and data analytics. SAP BPC, version for SAP S/4HANA also leverages master data directly from SAP S/4HANA, which provides consistent master definitions across the ERP and planning solutions without having to load and refresh master data consistently.
Furthermore the real-time integration between SAP BPC and SAP S/4HANA provides planners and reporters with the ability to view and react to the latest organizational changes through real-time master data integration. SAP Analysis for Microsoft Office reporting tool provides the ability to slice and dice data in real time, while SAP Analytics Cloud supplements the capabilities of SAP BPC through more in depth visualization capabilities.
Reduce the Total Cost of Ownership for Planning Systems
Both SAP BPC and SAP Analytics Cloud provide organizations with solutions that can be implemented with reduced total cost of ownership due to lower data duplication and native integration to SAP S/4HANA Finance . SAP Analytics Cloud is a cloud-based solution with out of the box content that can be leveraged for both planning and visualization, while SAP BPC is integrated with SAP S/4HANA and leverages the same master data and Universal Journal .
Financial planning, budgeting, and forecasting are important parts of a business that can easily be hung up with a poor finance system. In this post, we discussed how SAP S/4HANA, SAP Analytics Cloud, and SAP Business Planning and Consolidation can help a business overcome the pain points brought about by planning, budgeting, and forecasting.
Editor’s note : This post has been adapted from a section of the book SAP S/4HANA Finance: An Introduction by Maunil Mehta, Usman Aijaz, Sam Parikh, and Sanjib Chattopadhyay.
Beginning your finance transformation? Looking to learn what SAP S/4HANA has to offer? This book is your starting point for SAP S/4HANA Finance! Learn about the suite’s architecture and explore its capabilities for your core finance processes: financial accounting, management accounting, treasury and risk management, planning, consolidation, and close. Unlock enterprise-wide finance reporting, assess your deployment options, and design your finance project with this introductory guide!
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9 steps to successful functional strategic planning.
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July 11, 2022
Contributor: Jackie Wiles
Take these steps to ensure your strategic planning process is productive, adaptable and tied to enterprise goals.
Pivots in strategic plans now happen with increasing frequency, and functional leaders must keep up.
Aim to create and communicate a clear action plan that states where the function currently is, where it needs to be, how to get there and how you will measure progress.
Even once the strategic plan is adopted, revisit it regularly to ensure it remains valid — and adapt as needed to changing scenarios and business conditions.
Seventy-six percent of corporate strategy leaders say significant pivots to strategic plans now happen with increasing frequency. While functional leaders should never develop strategic plans in a vacuum, today’s disruptions — from price and wage inflation to risks related to Russia's invasion of Ukraine — make it especially critical for functional strategic plans to account for a variety of scenarios and be able to change with pivots in enterprise strategy.
“The key is to abide by some key principles of any strategic planning process — whether at the enterprise, business-unit or functional levels,” says Marc Kelly , VP at Gartner. “Eliminate everything that isn't necessary and sufficient to communicate an effective strategy.”
Download now: Build a Better Strategic Plan for Your Function
Commit to being strategic-minded
Before you even start your functional planning process, commit to keeping a strategic mindset. Don’t allow yourself to be hijacked by short-termism, tactical execution plans and other check-the-box activities. All too often, concerns about meeting short-term targets, fear of failure and a preoccupation with operational issues overwhelm aspiration.
This principle applies to your mindset on cost management and budgeting . Commit to a strategic approach wherever and whenever you decide which initiatives to pursue and fund.
View your function’s cost architecture through the lens of business value, and view cost optimization as a continuous discipline focused on directing resources (time, capabilities and budget) to differentiating growth initiatives , such as digitalization. Be clear on the best budgeting approach(es) for your function’s needs, considering what type of purpose-driven budgeting best supports your strategy execution.
Download now: Your Guide to Optimizing Costs Strategically, Not Tactically
Then take a methodical step-by-step approach
The best functional plans identify select initiatives that will drive enterprise ambitions and commit the capacity (time, budget, talent and technology) necessary to execute successfully. These nine steps provide a guide by which functional leaders can ensure a rigorous approach to planning, however adaptive their enterprise’s strategy .
Step 1: Outline expectations
Clearly define the enterprise and business context upfront for all stakeholders to prevent managers and executives from misunderstanding one another and derailing the process.
Outline for your function the responsibilities, process timelines and expected outcomes for each participant, especially in cases where the planning and budgeting processes cross functions. Identify which stakeholder(s) will ultimately sign off on your strategy and budget plans.
Step 2: Verify the business context
Enterprise mission , which defines your organization’s reason for being and the goals it will continually pursue.
Example: One electric-car maker’s mission “to accelerate the world’s transition to sustainable energy ” reflects its absolute commitment to moving toward sustainable practices and reminds employees of the company’s broader purpose.
Enterprise vision , which embodies the organization’s abstract but realistic aspirations, including underlying values, principles and beliefs that support its decision-making processes.
Example: One aerospace company’s vision “to be the premier international defense, aerospace and security company” is realistic and more alluring than the status quo. It is directional and focused.
Make sure your function’s employees know how the mission and vision apply to their specific work. Be clear what impact business priorities, challenges and pivots will have on your function’s imperatives, opportunities, risks and priorities.
Step 3: Set goals and objectives
Enterprise strategy translates business aspirations into:
Goals: Individual or combined undertakings that, when achieved, drive differentiated value in the longer term.
Example: Become the largest supplier of renewable electricity in Europe.
Objectives: Discrete and measurable steps that describe how you will achieve a specific goal (see step 4 for the actions required for this).
Example: Increase wind capacity by 200% overall in three years with 10 new wind farms across five regions in Europe.
Once clear on the enterprise plan, you can evaluate the current state of your functional activities, identify the future state, and set goals and objectives accordingly.
Step 4: Develop an action plan
This is the stage at which you take your general assessment of goals and objectives and translate them into detailed action steps with assigned responsibilities. This functional action plan should be a formal document that summarizes the sequence of steps or initiatives required to attain an objective. This is the primary source of information for how you will execute, monitor, control and close out objectives.
Action plans are subject to change as surprise events occur, so be prepared to respond with an adaptive strategy .
Step 5: Assess your capabilities
Identify key functional capabilities required to execute on your action plan. Ask business partners to assess how they perceive your function’s strengths and weaknesses. Your assessment and that of your business partners should broadly align. Regardless, generate a prioritized list of functional capabilities to bolster or gaps to fill as a result of your findings.
Step 6: Set measures and metrics
The terms measure and metric are often used interchangeably, but they are different.
A measure is an observable business outcome (for example, employee engagement ). Measures allow you to evaluate the efficacy of your action plans. Agree on them in advance to avoid reporting biases.
A metric describes the actual data collected to quantify the measure (say, percentage of “satisfied” employees according to an annual survey ).
Make sure measures and metrics are complete enough to account for a range of variables. For example, don’t only use customer satisfaction to measure engagement. Also track critical factors, such as discretionary effort and intent to stay.
Step 7: Put your strategy on one — yes, one — page
Simply and clearly state the key elements of your strategic plan: where the functional organization is, where it is going and how it will get to the future state.
Capture an overview on a single page that communicates how you are adding value today and demonstrates how you plan to impact the business over the next year. Include a statement of strategy, a before-and-after description of the state of your function, one or two critical assumptions underpinning the strategy, and five to seven initiatives required to meet the functional objectives established to support business goals.
Step 8: Drive the plan home
Do this by evangelizing the objectives and strategy across your function and company. The one-page strategy template is a helpful tool, as it makes the plan easy for others to consume, but you’ll still need a deliberate process for communicating the plan — and ensuring that key constituencies understand and agree with it.
You must develop a clear and consistent message that drives buy-in and commitment among functional leadership and engagement and motivation among the workforce, with all stakeholders clear on how your priorities are changing and why.
Step 9: Prepare to respond to change
Once the strategic plan is adopted and shared, it’s critical to measure progress against the objectives, revisit and monitor the plan to ensure it remains valid, and adapt the strategy as business conditions change. To do this:
Monitor triggers to track the effectiveness of the strategic plan.
Cancel underperforming projects quickly.
Track and validate assumptions periodically.
Lastly, make sure you have an agreed-upon action plan for specific steps to take or decisions to make to increase the chances of success when monitoring triggers an alarm.
This article has been updated annually to reflect new events, conditions and research.
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Strategic Planning for your function? Here are four critical things to know and do, and a customizable one-page template to capture your strategic plan.
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Planning, budgeting and forecasting is typically a three-step process for determining and mapping out an organization’s short- and long-term financial goals:
- Planning provides a framework for a business’ financial objectives — typically for the next three to five years.
- Budgeting details how the plan will be carried out month to month and covers items such as revenue, expenses, potential cash flow and debt reduction. Traditionally, a company will designate a fiscal year and create a budget for the year. It may adjust the budget depending on actual revenues or compare actual financial statements to determine how close they are to meeting or exceeding the budget.
- Forecasting takes historical data and current market conditions and then makes predictions as to how much revenue an organization can expect to bring in over the next few months or years. Forecasts are usually adjusted as new information becomes available.
The process is usually managed by a chief financial officer (CFO) and the finance department. However, the definition can be expanded to include all areas of organizational planning including: financial planning and analysis, supply chain planning, sales planning, workforce planning and marketing planning.
Basic business accounting practices date as far back as the 1400s, when Venetian investors kept track of their Asian trade expeditions using double-entry bookkeeping, income statements and balance sheets. The word “budget” is from the old French word “bougette,” meaning “small purse.” The British government began to use the phrase “open the budget” in the mid-1700s, when the chancellor presented the annual financial statements. Businesses began to regularly use the term “budget” for their finances by the late 1800s.
Modern business forecasting began in response to the economic devastation of the Great Depression of the 1930s. New types of statistics and statistical analyses were developed that could help business better predict the future. Consulting firms emerged to help companies use these new prediction tools.
Accounting and forecasting were difficult in the early 20th century because they depended on laborious hand-written equations, ledgers and spreadsheets. The emergence of mainframe computers in the 1960s and personal computers in the 1980s sped up the process. Software applications such as Microsoft Excel became widely popular for financial reporting. However, Excel programs and spreadsheets were prone to input errors and cumbersome when various departments or individuals needed to collaborate on a report.
By the start of the 2000s, companies gained access to ever-growing operational data sources, as well as information outside corporate transaction systems — such as weather, social sentiment and econometric data. The vast amounts of available data for forecasting created a need for more sophisticated software tools to process it.
Numerous planning software packages emerged to handle this data complexity, making planning, budgeting and forecasting faster and easier — both for processing and collaboration. With predictive insights drawn automatically from data, companies could identify evolving trends and guide decision making with foresight, not just hindsight.
Today, cloud-based systems are becoming the standard, providing more flexibility, security and cost savings — helping organizations generate accurate predictions and budgets with fewer errors.
But despite these advancements, businesses are still quite dependent on traditional spreadsheets. 1 Seventy percent of businesses say they rely heavily on spreadsheet reporting, with only 16 percent using on-premise specialist software — and only ten percent using cloud software for planning.
Many businesses still base their strategy on annual plans and budgets, which is a management technique developed over a century ago. But in today’s more competitive environment, organizations are realizing that plans, budgets and forecasts need to reflect current reality — not the reality of two, three or more quarters ago. Continuous planning and rolling forecasts are becoming widely used methodologies to update plans, budgets and forecasts frequently throughout the year, on a quarterly or even monthly basis. These approaches help managers spot trends before their competitors — helping them make better informed, more agile decisions about pricing, product mix, capital allocations and even staffing levels.
Creating and implementing a sound planning, budgeting and forecasting process helps organizations establish more accurate financial report and analytics — potentially leading to more accurate forecasting and ultimately revenue growth. Its importance is even more relevant in today’s business environment where disruptive competitors are entering even the most tradition-bound industries.
When companies embrace data and analytics in conjunction with well-established planning and forecasting best practices, they enhance strategic decision making and can be rewarded with more accurate plans and more timely forecasts. Overall, these tools and practices can save time, reduce errors, promote collaboration and foster a more disciplined management culture that delivers a true competitive advantage.
Specifically, companies are able to:
- Quickly update plans and forecasts in response to new threats and opportunities, identifying risk areas early enough to rectify issues before they are serious
- Identify and analyze the impact of changes as they occur
- Strengthen the links between operational and financial plans
- Better plan and predict cash flows
- Improve communication and collaboration among plan contributors
- Consistently deliver timely, reliable plans and forecasts, plus contingency plans, for a range of possible events
- Analyze variances and deviations from plans and promptly take corrective action
- Create a budget specifically for growth and having confidence in how much can be spent
- More accurately manage sales pipelines while tracking performance against targets
- Make more confident strategic decisions based on hard data, instead of hopes or guesswork
- Provide evidence of an organization’s future trajectory to potential investors and lending institutions based on multiple data sources and sophisticated analysis
Budgeting, planning and forecasting software can be purchased as an off-the-shelf solution or as part of a larger integrated corporate performance management (CPM) solution.
Advanced software solutions enable organizations to:
- Measure and monitor performance through interactive, self-service dashboards and visualizations
- Examine root-causes with high-fidelity analysis of dimensionally rich data
- Evaluate trends and make predictions automatically from internal or external data
- Perform rapid what-if scenario modelling and create timely, reliable plans and forecasts
Planning is easier and more effective when practitioners follow well-established best practices. Software solutions that support these practices can enhance the timeliness and reliability of information and increase participation by key people throughout the organization; especially those at the front lines.
Leading companies have moved to solutions that address the full planning cycle — data collection, modeling, analytics and reporting — on a common planning platform with lean infrastructure requirements. Such platforms can handle a diverse range of business functions, from budget-focused finance tasks to, for example, supply chain-focused planning for retail environments with thousands of SKUs (stock keeping units).
Companies like IBM offer holistic, integrated software solutions to streamline the planning, budgeting and forecasting process. The logic is that to adapt to today's quickly changing business conditions, an organization needs one solution that creates a single source of truth and visibility into all its data. These solutions can extend well beyond the financial aspects of the business, becoming a powerful forecasting engine across the enterprise. With these agile planning and exploratory analytics software solutions — whether in the cloud or on-premises — companies can perform planning, budgeting and forecasting with greater speed, agility and foresight.
Evaluating and selecting planning, budgeting and forecasting software is a complex task. It requires careful consideration of the software’s functionality, its value to the planning process and its ability to support planning best practices. There are also factors such as vendor reliability and support, user community connections and commitment to customer success once the sale is complete.
IBM Analytics (PDF, 352 KB) recently published a guide to help organizations evaluate planning, budgeting and forecasting software — identifying key qualities to look for:
- Adaptive . Can you rapidly change models and re-forecast frequently, based on input from business units? Can you update plans as often as necessary?
- Timely . Is your information always current because users contribute directly to a central planning database? Are your consolidations and rollups done automatically to easily meet deadlines?
- Integrated . Do your planning, analysis, workflow and reporting functions reside on one common platform, reducing the need to maintain “shadow” planning systems?
- Collaborative . Is your solution web-based? Does it enable participation anytime, from anywhere with a secure connection?
- Self-service . Are users able to access data and perform complex analysis without the assistance of IT? Are you able to use a familiar spreadsheet interface for faster user adoption and accelerate time to value?
- Enterprise-scale data capacity . Is your solution capable of handling very large data volumes without limiting cube size? Some solutions do not handle “data sparsity” well — forcing data to be split into multiple cubes for analysis, causing version control issues.
- Efficient . Are your managers able to spend less time managing data and more time managing the business?
- Relevant . Do you have the ability to customize views for different user roles, to help increase adoption and process ownership? Do you have formula capabilities that enable modeling of all relevant business drivers?
- Accurate . Do your plans contain errors because of broken links, stale data, improper rollups and missing components?
The key is not just evaluating product features and capabilities, but also evaluating how those features will be implemented by different users within the organization. It’s important to test any planning solution that will be used by a large variety of stakeholders such as finance, operations, HR and sales.
Relevant case studies
Discover how one of the largest operators of parking facilities in the Middle East used IBM Planning Analytics to deliver better automation and multidimensional analytical power along with cost advantages.
Learn how the real estate developer enhanced its core planning, forecasting and project management capabilities with IBM technology to drive even greater profitability.
Find out how the company used IBM planning analytics to provide monthly and weekly reporting for engineering, marketing, sales and operations.
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Learn how companies are delivering dependable business forecasts and optimizing the allocation of resources. (2 MB)
Learn the five common drawbacks to spreadsheets as planning tools. (769 KB)
Discover the benefits of embracing data and analytics in conjunction with well-established planning and forecasting best practices. (352 KB)
See how you can synthesize information, uncover trends and deliver insights to improve decision making throughout the enterprise.
See why Business Application Research Center (BARC) found that “IBM once again achieves an excellent set of results” for its business planning software.
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1 The Future of Planning, Budgeting and Forecasting Global Survey, Workday and FSN, 2017 (PDF, 2.64 MB)
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