Four High-Value/Low-Risk Steps to Make Your Next Budget Easier and More Powerful
It’s budgeting season again. In many organizations, it’s more time-consuming and less productive than it could be. If you already have Essbase or Oracle Planning, you already have the basis for a world-class budgeting and planning system. But what features and capabilities do you need to make planning as productive as possible and provide the highest ROI? Every company is different. But based on several decades of experience building Essbase and Planning applications, here are a few suggestions that can dramatically reduce cycle times and improve strategic insight. If you already have a planning system, you may be able to add these features to your existing system. If you are building a new system, consider including them in your design.
Link Existing Excel Models to Planning Forms
This one may seem like a baby step, and it is. But in some cases, it’s a big win without a lot of effort. There are good reasons to reduce dependency on spreadsheets but there are also times when spreadsheets are the right tool for the job. The business units that submit the budgets may already have Excel models that work well for them. Those models probably contain the data corporate needs along with a lot of business unit-specific detail that corporate doesn’t need. Combining data from a lot of Excel models is notoriously cumbersome, time-consuming, and error-prone. Instead, you can easily automate the submission of the required results by building forms in Oracle Planning that link directly to the business unit Excel models. The business units can keep the models they prefer but now budgets can be submitted or revised with a few clicks. You save a lot of time, reduce errors, and make re-forecasting much faster.
Driver Based Budgeting (DBB)
This is probably the single biggest missed opportunity in budgeting and planning. While it requires some effort, the benefit is huge. Driver Based Budgeting dramatically reduces the effort to create a new budget or forecast because most of the results are automatically calculated based on a handful of “strategic drivers”. For example, COGS might be calculated as a percentage of its driver: Sales. When planners change the input for Sales, those changes ripple through the Income Statement, Balance Sheet, and Cash Flow Statement. Think about how many line items could be driven by headcount: salaries, payroll taxes, benefits, office space, laptops, etc. In the above example, Sales and Headcount are “strategic inputs” because they are two of management’s “decision variables.” For example, management might ask, “What would my financials look like if Sales grow at 10 percent and headcount grows by 100 people?” Or they might ask, “How many new heads can I hire before cashflow falls below a certain threshold?” Drivers can be as high level or as detailed as needed. For instance, you could have separate drivers for different levels of employees.
Sometimes, the driver relationship is simple. For example, COGS might be a predictable percentage of sales. Sometimes it’s much more complicated. COGS may be a complicated step-function or rent increase may be the result of several escalators. But the more complicated the relationship is, the greater the benefit of DBB because you save more people more time. The more line items you can “drive” automatically through calculations, the less time you spend on input, the better your plan responds to change, and the more time you have to think strategically about the results. There is a communication and accountability advantage, too. In many cases, the drivers are the KPIs by which the business is measured. For example, Receivables and Payables may be driven by DSO targets. This links the budget back to day-to-day operating targets. “Driving” the entire Income Statement, Balance Sheet, and Cash Flow is a tall order. But it isn’t necessary to do it all at once. You can start with the most time-consuming items and work your way through the entire system.
Driver-based budgeting can dramatically reduce cycle time and transform budgeting from a time-consuming input exercise to a tool for strategic thinking. For one of our customers, we recently implemented driver-based budgeting focused mostly on COGS and Payroll costs. That customer believes those improvements reduced time spent by 15% to 20% and shortened their budget cycle by 2 weeks.
Calculate a “Seed” Budget as a Starting Point
In many organizations, budgeting starts with gathering a lot of historical data and using that as a starting point for the new budget. That’s very time-consuming and mostly unnecessary. If you have implemented driver-based budgeting, you have a head start. You can use the same calculations, with driver inputs automatically calculated from recent actuals as a starting point. Now, instead of spending time gathering old data, planners can instantly see the historical relationships. Now they can spend their time thinking about how the business is changing and adjust the drivers accordingly.
COVID-19 showed us that existential changes in the economic environment don’t fall neatly into our business calendar. Neither does our need to respond to them. We should be able to easily re-forecast when conditions change, or a new opportunity or threat arises. A study by the Association for Financial Professionals found that “only 50 percent of companies can easily create an out-of-cycle forecast”. Once we have implemented driver-based budgeting, it’s relatively easy to run a re-forecast whenever conditions change. The easier it is to re-forecast, the more strategic questions you can ask and the better prepared you can be for new risks and opportunities.
Every company is different. But the steps above represent some potentially big wins with relatively low risk. These steps can dramatically reduce the time spent on low-value activities such as data entry and significantly increase the strategic value of your budgets and plans.