Planning for the future – by not looking back

Aerial view of business data analysis graph

Guest post by Paul Baron

Something has changed in Financial Planning over the past couple of decades, and not every organisation has cottoned on. Many Finance Directors are still planning for the future by assuming it looks like the past. But nothing could be further from the truth.   

Many organisations start their detailed budget creation six months before the start of the year (I once witnessed an 18-month process!) and are surprised that their budget is out of date before the budgeted year has even started. That can be compared to buying stale bread, or tickets for last week’s lottery.

Of course, your timeline will certainly reflect the amount of detailed work your budgeting processes entail: the careful modelling of how costs were built up; the minute variances that drive your sales figures, the intricate cost of sales analysis, including standard costing for goods produced, as well as studying detailed standard cost variances over the previous year to fine tune those costs.

Staff costs, marketing costs, wastage costs, property costs and utilities all given the same detailed treatment. You are likely to be a team of very clever people doing terribly clever analysis, to produce carefully modelled budgets.  But do your efforts actually work? 

Here are five reasons why you should move away from traditional planning. 

1. You should forecast more  

Frequency is the most obvious change. A once-a-year budget may (just about) be warranted, but we all acknowledge it goes out of date very quickly. If you need to do it, fine, go ahead, but give it the attention it deserves. It will only be useful as a benchmark for the actuals to be compared against. Forecasts, meanwhile, cannot be a once-a-year activity. If not monthly, then quarterly, adopt one of them as your budget to save any additional effort.  

2. Accept that perfection doesn’t exist  

Aiming for perfection is a fool’s errand. Twelve months to produce an out-of-date budget gets you no nearer to perfection, so change the mindset. Aim for a tolerance level that suits each part of your business’s functions. Maybe tolerances on manufactured product costs could be 98 per cent, while stationary forecasts can be 75 per cent or less. Perhaps staff costs can be 95 per cent accurate since people do unexpected things like leave the company, so how accurate can you really be? Spend appropriate amounts of time aiming to get a good approximation – but accept perfect doesn’t exist.  

3. Use scenario planning  

Best and worst-case scenarios can be a better route than aiming for a perfect prediction. Aim for the best but plan for the worst. Adopt a planning and forecasting solution that makes scenario planning very easy, such as FORECASTED by Simpson Associates. Creating new scenarios based on a previous plan takes a few minutes, then simply change whichever assumptions or figures you want to flex, and you immediately have a new scenario.  

4. Have a Plan A, and a Plan B, and a few more besides  

Business scenario planning is more than just best case/worst case. Try doing what-if analysis against any major policy changes or business decisions before they come into effect. What if your workforce receives the dreaded Covid ping and you have to close your business or are unable to transport your products, and what if it doesn’t happen? 

Play around with different dates. If your model supports scenario planning, then this should be easy. A business needs many plans. Given recent events, some companies may well be on to Plan E or F by now. Others may have ripped up Plan A and had nothing to replace it with. Some companies don’t create multiple plans because their existing forecasting software cannot easily create them, or their models are too big to replicate.   

5. Move from perfect planning to agile planning  

Divert all that effort that went into perfect planning towards agile planning. Spend your time modelling your business and then spend limited time each month or quarter fine-tuning or creating new scenarios in a fraction of the time.   

To ensure business success, every organisation, whether it is for profit or non-profit, must be able to plan, manage and maintain its finances. In an ideal world, you want to be able to plan with agility, whilst using a solution that enables you to do scenario planning and can be built either bottom-up or top-down. 

If you need to involve more people and still need to model large datasets, but you don’t know how to make all of that happen, learn about FORECASTED. Powered by IBM, it has a modelling engine that copes brilliantly with large planning models and presents its outputs in IBM Planning Analytics Workspace (PAW) so the whole business can be involved.