The Six Levers of a Comprehensive Reporting Strategy

A company’s reporting strategy provides the foundation for a robust and mature information management program designed to deliver timely, relevant and actionable information to the company’s management in order to make sound decisions when executing the corporate strategy. Regrettably, most companies have have an incomplete reporting strategy, not having considered all of the dimensions required to produce a mature reporting environment.  

A mature reporting strategy is based on six levers:

1. Corporate Strategy,
2. Information Management,
3. Process Management,
4. Organizational Alignment,
5. Reporting Governance, and
6. Technology Enablement

These six levers work together to effective drive a company’s information management program. Managed as a strategic asset, the information generated and reported to a company’s management group will yield valuable and actionable insights. All of these levers must be incorporated into the reporting strategy in order to yield the most effective reporting environment.  In future posts, I'll delve into each of these dimensions to show how a company can establish and maintain a robust and mature reporting environment.

Effective Financial Forecasting - Part 2

Note: This is the second post on effective financial forecasting.  You can read Part 1 here.

Given the challenges of forecasting and its importance to organizational management, companies must find better ways to manage forecasting.  Fortunately, leading companies are finding ways to make the insights from the forecasting process more meaningful.  Listed below are five steps a company can take to transform the forecasting process:

• Integrate Forecasts:  The financial forecast will never be accurate if it is developed independently of other forecasts.  Line items in the financial forecast should have direct ties to forecasts and planning assumptions made by Sales and Operations.  All groups should be using a common set of drivers and assumptions regarding the economic outlook and the expected demand for the company’s products or services.  A key benefit will be increased communication between departments.

• Leverage Technology:  Performance Management is one area that has lagged in the area of technology investments and integration.  An effective forecasting process will have an application dedicated to the planning and performance management process to enable web-based data entry and automated roll-ups based on the reporting structure. 

• Reduce the Level of Detail:  Most forecasts could benefit by dramatically reducing the level of detail.  Every forecast should minimize the level of detail needed to forecast revenue and profitability.  Attention should be paid to those key line items that drive changes in the forecast.

• Implement Rolling Forecasts:  Business events do not follow the artificial distinction of a fiscal year end.  An effective forecasting process uses a rolling forecast to project beyond the current fiscal year.  Six quarters is typical but it can vary by company and industry. 

• Drive Cultural Change: Ultimately senior management will set the tone for the forecasting process.  If managers know they are going to face a backlash for telling the truth, they will continue to game the system and submit unrealistic forecasts.  An environment must be created where there is an incentive to create accurate forecasts and where managers have the political support to do so.

Conclusion

By following these best practices, companies will be able to reduce the time and effort required to develop a usable forecast.  With improved forecasting, companies will have an effective tool for executing strategy, allocating resources and communicating expected results with key stakeholders.

Effective Financial Forecasting - Part 1

“Prediction is very difficult, especially if it's about the future."

--Nils Bohr, Nobel Laureate in Physics

Predicting the future has never been easy.  And in today’s dynamic and global environment, it’s harder than ever.  Yet despite the difficulties, an effective forecasting process is essential to properly managing a company.  Numerous stakeholders, both internally and externally, depend on the forecast to evaluate the health and direction of the company.

Despite the importance of an effective forecasting process, many companies continue to struggle with a process that is highly manual and time-consuming, and that yields information that is often inaccurate and quickly obsolete.

There are various challenges that contribute to forecasting difficulty:

• Management Expectations: Most management teams like detail and forecasting is no exception.  Most forecasts are far too detailed, creating a lack of focus on the key drivers that “move the needle” on revenue and profitability.  A large amount of detail in the forecast requires more information, and turns into a data collection exercise instead of focusing on the insights produced by the forecasting process.

• Data Management: The monthly close cycle of many companies prohibits the timely collection of data.  Additionally, the level of granularity provided by the accounting process is often inconsistent with the forecasting requirements of management.  Finally, quality operational data is required to understand the drivers of revenue and cost, yet this is exactly the type of data that is difficult to retrieve from a company’s information systems.

• Disconnects Between Forecasts: Companies have multiple forecasts.  Sales, Operations, Marketing and Finance all have different forecasts with different models, assumptions and time horizons.  When there is a disconnect between the various groups, it is virtually guaranteed that the financial forecast will be inaccurate.

• Technology: Despite the millions of dollars invested in enterprise technology, many companies still rely on Excel spreadsheets to collect, consolidate and report forecasts.  This leads to a highly manual effort that requires substantial time.  The use of spreadsheets makes multiple updates of the forecast difficult and error prone.

• Organizational Culture: All too often managers are castigated for producing results below forecast.  As a result, managers are tempted to “game the system” by forecasting on the low end of expectations with the hope of ending above expectations at month-end.  This can lead to deliberately inaccurate forecasts.

In a subsequent post I'll discuss ways to create a more effective forecast.

Building a Better Budget - Part 3 - Eight Tips for a Better Budget

Note: This is the third post in this series.  You can read Part I and Part 2.

Given the challenges in the budgeting process, leading companies have moved to a new budgeting paradigm that emphasizes speed and flexibility.  Here are eight ideas to incorporate into the budgeting process:

• Establish key linkages between the strategic plan, the Sales & Operations Plan and the financial budget.  The numbers in the financial budget should be the culmination of a planning process that begins with the strategic plan and incorporates demand and supply plans from Operations.
• Scale down the budget.  Reduce the number of line items budgets to focus on the true drivers of revenue and cost.  It isn’t necessary or desirable to create a highly detailed budget.  Focus on key line items that are material and that are derived from supporting operational detail.
• Automate the budget with a dedicated software solution.  Reduce reliance on Excel spreadsheets and manual consolidations.  Invest in a dedicated software solution that provides a web-based interface for users, workflow, security and that automatically rolls up budgets at each level of the organization.  These software packages also facilitate the reporting of actual, budget and forecast data.
• Employ zero-base budgeting.  Don’t use last year’s numbers as a base for the upcoming year.  It’s too easy for managers to simply resubmit their numbers without going through the exercise of determining costs based on estimated activity volume.
• Document budget assumptions (e.g. growth rates, estimated activity volume).  Just as footnotes are an integral part of financial statements, the assumptions made to develop a budget are also critical.  Assumptions must be realistic or the budget will lose credibility.
• Foster dialogue across functions.  The process of budgeting, if done correctly, can add as much or more value as the budget itself.  When departments work together on an integrated budget, they gain a better understanding of the challenges facing the overall organization.  Strong communication leads to more useful budgets.
• Move compensation goals from a static budget to a series of balanced KPIs.  Yes, some will still be financial in nature and a streamlined budget can capture those.  Revenue, Gross Margin, EBIDTA, Return on Invested Capital can all be measured against pre-established targets.  But managers should also be evaluated on non-financial factors such as product innovation, time-to-market, employee satisfaction, customer retention and customer satisfaction ratings.
• Allocate capital based on a dynamic forecast rather than on a static budget. In most industries business events occur too quickly to depend on a static budget for capital allocation.  Leading companies use their forecast to identify emerging market opportunities and enable them to respond more quickly to those opportunities. 

Budgeting still matters, but to obtain the greatest value from the budgeting process, companies need to adjust to the present realities.  By following tips outlined above, companies will produce more meaningful budgets with less effort and cost, freeing up time and management attention to focus on creating value in their businesses.

Building a Better Budget - Part 2 - The Problems with Traditional Budgeting

Budgeting as a tool can be very useful but the traditional budget is a product of a distant past.  During most of the 20thcentury, manufacturing dominated the industrial landscape.  These businesses were hierarchical and capital intensive.  It was the job of managers to oversee the deployment and allocation of capital.  To do so, they needed strict controls over capital allocations and information to understand how closely they were tracking to their financial objectives during the year.  Couple this with a business environment that was minimally impacted by globalization and it’s easy to see how a detailed, static budget was sufficient to provide value to management.

Unfortunately, while the world changed the annual planning cycle remained relatively unchanged, the budgeting process has remained relatively static.  Whereas in the past manufacturing facilities and production volumes helped determine corporate value, companies today are far more likely to create value through product innovation, mass customization and agile supply chains.  Given the new realities, traditional budgeting suffers from the following issues:

• The traditional budget takes too long to prepare.  It isn’t uncommon for a budget to require 4 – 5 months and consume a substantial portion of executives’ time. 
• The budget is too manual.  Many companies prepare and consolidate their annual budget in Excel.  This increases the time necessary to develop the budget and exposes the budgeting process to human error as spreadsheets are manually combined to reflect organizational roll-ups.
• The level of detail is too great.  At some companies the budget is at the same level of detail in the Chart of Accounts.  This creates far more complexity than is necessary.  Instead of facilitating the budget process, it actually becomes a hindrance to the creation and monitoring process.
• The number of iterations is too high.  A typical budget can require 5 - 6 iterations before the numbers are accepted by senior management.  Leading companies focus on minimizing the number of iterations to reduce the time and effort spent on budgeting.
• Budgets are internally focused.  Most of the numbers in the budget are based on previous years’ data.  All too rarely is a budget based on existing and anticipated economic factors that drive volume and cost.  Few companies evaluate their proposed revenue and cost structure based on similar companies in the industry.  Finally, the budget measures internal metrics such as revenue growth, but fails to take into account other levers of value such as customer satisfaction.
• Budgets lock in costs through the year.  While the budget is thought of as a tool to control costs, all too often costs are locked into the budget for the year.  Even if economic conditions vary widely from the assumptions upon which the budget was built, the company’s cost structure resists downward pressure as those costs were budgeted for the year.
• Politics permeates most budgets.  The annual budgeting process has become a high-stakes game of bluffing.  Many managers “pad” their budgets with extra costs so that they end up with something they envisioned after their budget requests have gone through multiple iterations.
• The budget is quickly obsolete.  Given that the budgeting process can start four or more months before the end of the fiscal year, and coupled with a dynamic business environment, it’s no surprise that many budgets are obsolete after the first month of the fiscal year. 

In the third and final post in this series, I'll discuss eight leading practices in the budgeting process.

Building a Better Budget - Part 1 - The Goals of Budgeting

Speak with virtually anyone involved with the annual budgeting process and they’ll tell you that it’s painful: Time consuming, difficult, error prone, and based more on politics than on valid economic assumptions.  The worst part, however, is that the budget is viewed as obsolete almost as soon as it’s complete.  Despite these challenges, most corporations have stuck with the traditional budgeting process as they don’t believe they have anything better to replace it with.

Fortunately there are companies who have scrapped the traditional notion of a budget and have replaced it with something much more useful.  They still have a budget, but their updated budget has been streamlined.  No longer do they put themselves through the long and difficult budgeting process; rather, they focus on creating a budget that is far less detailed but that communicates the key ideas of the planning process.

The Goals of Budgeting

The annual budget and the budgeting process serve a number of goals.  Among them are:

• Link operational plans from multiple departments.  The budgeting process, as opposed to the actual budget, fosters communication and enables the coordination of business unit and departmental activity across the organization to support the achievement of strategic plans.
• Capital allocation.  One of the key aspects of the budget is to decide where a company will employ its resources.  Strategic plans around new products and markets, research and development, production capacity and other dimensions will feed directly into the budget.
• Performance monitoring.  The control of capital and the early detection of deviations from establish plans have also been key elements of budgeting.  Reports comparing the variance of actual results from budget are a standard component of management reporting packages.
• Compensation rewards. Many executives have a portion of their pay linked to the attainment of budget goals.  The targets established through the strategic planning process are incorporated into the budget and ultimately into the annual performance plan for these executives.

In subsequent posts I'll discuss the problems with traditional budgets and the opportunities to create a more effective budgeting process.