Mark Dye, FSNs contributing editor, looks at the latest research from BARC, the Business Application Research Center which has released the preliminary results of its latest study titled "Planning and Budgeting in Europe – Status quo and opportunities for performance management in large and medium corporations”. The study, sponsored by Tagetik, a rapidly growing performance management vendor that has recently entered the UK market, researched different planning requirements and approaches in 500 European companies.
Two of my least favourite words have always been planning and budgeting. They always seem to get in the way of fun things we want to do in life. Truth be told, I bet most financial directors (FDs) or Chief Financial Officers (CFOs) secretly feel the same. However, with the current malaise and squeezed margins being the order of the day, both remain essential elements in the mix of running any successful business.
For large firms, these may include multi-year time horizons by key operating divisions, zero-based annual budgeting processes and monthly or quarterly forecasting processes where year-to-date actual data is merged with the most recent forecast information to get a better estimate on the full year expected results.
“Planning & Budgeting has traditionally been restricted to P&L items but the current credit crunch is affecting even the cash-rich organisations, due to the unusual pressures being placed by their banks. This is driving the need for both granular and long term Financial & Cash planning, extending 5 years or beyond. Planning at this level requires budgeting, rolling forecasts and future simulation at all 3 levels; Balance Sheet, P&L and Cash Flow, and, despite all of the rich functionality, spreadsheet models cannot be expected to efficiently or effectively cope with this level of detail,” says Shak Akhtar, Managing Director Tagetik UK & Ireland.
Nowadays though, says Mark Nashman, president and Chief Information Officer (CIO) at Clarity Systems, many will also have rolling forecasts, where the time horizon of the forecast extends for 18 or 24 months, or longer.
In addition to this, things like driver based planning - where key drivers are planned and the financial results are derived from these key drivers – and initiative based planning, where the planning process is centered around key corporate initiatives, are also likely, meaning that significant amounts of management time and resources are spent on this complicated process. Publicly listed firms may also make use of monthly variance reports and automated detection too.
"These approaches are used so that organisations can get a more accurate estimate of future performance and plan their activities accordingly," says Nashman.
Acccording to the latest study from Business Application Research Center (BARC), it was found that in addition to traditional planning approaches nearly 70 percent of companies surveyed use cash-flow planning while 56 percent use, or are about to deploy, a balanced scorecard when it comes to this.
The report, 'Planning and Budgeting in Europe – Status quo and opportunities for performance management in large and medium corporations', reveals that while 54 percent of companies without subsidiaries rely on one-year, short-term planning, 31 percent plan 3-5 years in advance. Interestingly, it was the reverse for large corporations with subsidiaries. In this instance over 52 percent conducted long-term planning of 3-5 years while 36 percent planned one year ahead.
The independent analyst researched different planning requirements and approaches in 500 European companies and discovered that there is also a connection between compliance and planning requirements. Nearly three quarters are already incorporating plausibility checks and tracking features for users in their planning processes. Furthermore, over a third of the companies surveyed even support tracking features for internal and external audits, process documentation and risk management.
"Each industry has its own unique set of issues related to budgeting and planning," adds Nashman. "The areas of the budgeting and planning process that differ most between industries would be in areas like revenue planning." Indeed, each industry will budget revenue quite differently, with some planning by product and others by customer.
"Some industries tend to plan at a detailed level for the largest customers and at a summary level for all other customers," explains Nashman. Others, he says, may plan revenue by location and by product line. "Some industries plan revenue by summary product group and by summary group of customers – these customers may then spread the revenue numbers down to the detailed customer and product level," he adds.
One of the most common problems with budgeting and planning comes from 'Excel-Hell' as many in the industry describe it. In their report BARC found that 82 percent of companies still rely on Excel in some form for planning though. However, less than 10 percent were happy with this unless it was supported by other systems.
Many still use it for preparative work as Excel remains a flexible solution which some people prefer to use before finally entering budget summary data into tools like Tagetik or Cognos, says Theunis Viljoen, MD, Biolap.
"Excel's flexibility is however also its main weakness as it makes it much more difficult to control templates and consolidate results," he adds.
"Clients of ours who have moved away from Excel say that they have increased their profits by better visibility - precisely because they have improved the accuracy of their processes," says Neil Davidson, UK Country Manager, Maconomy. "Running important procedures on Excel can cause inaccuracy and sharing information via Excel is also a challenge."
"The problem here is that as a company grows, their planning and budgeting solution grows to include many linked Excel files," adds Nashman. With these potentially running into the hundreds, across as many Excel files, he believes this can be highly prone to error.
The BARC report seems to back this up as those companies working with specialised planning software have the highest approval levels among staff, with 72 percent of users claiming to be 'rather' or 'very satisfied'. The study also confirms that planning is a long, expensive process with enterprises devoting an average of 42 days per year to planning activities. The results also show that planning is more time-consuming for multinationals where 55 days are taken and for those in the banking and insurance industries which take 45 percent longer than their counterparts. Those companies with specialised planning software also had 25 percent shorter cycles compared to those using Excel, while those utilising a single solution have a 50 percent shorter cycle than those using a combination of four or more solutions.
“Much is made of the Fast Close however, there’s also significant value in applying the same principles to planning,” says Tagetik’s Akhtar. “With the opportunity to reduce the planning cycle by 25%, companies need to get much smarter in using technology to prepare their plans and allow and seek to eliminate the reliance on spreadsheets if they want to deliver swifter analysis.”
"As organisations grow and more stakeholders become involved both at national and international levels, these processes quickly become even more challenging," says Dr Carsten Bange, CEO at BARC.
However, as Viljoen points out, even if it is challenging, there is no question that detailed planning leads to better measurement and better management. "The better companies get at planning, the more sophisticated the areas that they budget on. In the past many companies spent 99% of their time budgeting the P&L without any regard for the balance sheet and cash flow implications," he says. "This is changing."
