There’s no doubt about the goal of your annual budget: Provide a foundation for the upcoming fiscal year, and as the year progresses, track corporate performance against it.
No problem, right? The challenge is, traditional budgets are often unresponsive to market changes. That means targets are not consistently aligned to strategy, long-range plans don’t support overall objectives, and accountability is unclear.
That’s why integrated, driver-based planning is crucial to any thriving, agile business. The goal is to translate what your organization does into numbers, make it easy to collaborate with others during the forecasting process, and ultimately produce business plans focused on metrics most responsible for organizational success.
This is especially relevant for today’s fast-moving companies, where planning needs to move from a static business process to an active business process. Ascertaining those business drivers can be tough when individuals and departments have varying definitions of those drivers.
But if you use the five steps below to model business goals through performance numbers, it’s much easier to create a single, cross-departmental definition of your business’ most meaningful performance drivers.
1. Define the right driver-based planning and assumptions for your business
When you’re implementing driver-based planning, you want to analyze and adjust your major drivers: profit, working capital, and risk. You should also incorporate risk mitigation into your forecasts and consider common risk factors, like shifts in cost or access to capital, compliance, and price volatility.
2. Institute performance monitoring
Once the annual budget is set, plans will inevitably change. Tracking and communicating these changes is critical to keeping senior management aligned on the overall corporate objectives.
3. Integration means collaboration
Instead of creating standalone driver-based plans by individual departments, consider financial modeling focused on cross-departmental factors that tie to the overall corporate objective. This will give employees across the company a better understanding of how other departments define success, ultimately increasing objective discussions and decision-making. Such transparency makes it easier to create more valuable scenario plans, like increasing the headcount plan and then seeing the ensuing changes flow through the budget in terms of capital spend (laptops, rent allocation, benefits expense) and anticipated potential revenue.
4. Get operational input and buy-in from senior management
In order to achieve success with driver-based financial planning, upper management must support it and middle management must accept it. It’s crucial that executives are on board and are constantly reinforcing the message that the process is fundamental to business success. If the executive team doesn’t think sales forecasting is important, departmental managers won’t either. Make sure it’s clear that senior management is on board, and that the goal is only to obtain strategic and objective feedback.
5. Use rolling forecasts
What really differentiates a rolling forecast from a traditional forecast? Rolling forecasts call for a regular cadence of updating plans and performance against goals (actuals are typically rolled forward each month). It’s important to be aware of the changing market, and then incorporate that into financial models. You need to extend beyond the typical one-year planning horizon, and forecast at least four to eight quarters beyond the current quarter’s actuals to help senior management better proactively manage the future.
Our CFO Indicator Q3 2017 survey explores CFOs’ confidence relative to data and technology, as well as their progress in moving toward a “single source of truth” (single source of financial and operational data). Results reveal that Finance has successfully cleared what we believe to be one of the most significant hurdles—their hesitancy to store data in the cloud. Read our other CFO Indicator reports here.