Business Intelligence Blog from arcplan

Providing Visibility & Agility: The Key Components of Success in Planning, Budgeting, and Forecasting


aberdeen-group-guest-postIn my previous post, I discussed the role of spreadsheets in financial planning, budgeting, and forecasting. My key conclusion was that organizations need more substantial technology to facilitate these processes through automation. What I did not discuss was how these technologies provide greater visibility into the data that is essential for successful decision-making as well as the importance of utilizing this data to create forecasts that constantly reflect current business conditions. Today I would like to discuss these themes, but let's first take a step back to why they are important.

Aberdeen's 2013 Financial Planning, Budgeting, and Forecasting survey illustrated the top pressures hindering planning processes (Figure 1).

Figure 1: Pressures in Planning, Budgeting, and Forecasting


Source: Aberdeen Group, January 2013

Highlighting the importance of agility, organizations are pressured with volatile markets that make it extremely difficult to forecast effectively. This is compounded by the fact that 25% of organizations reported that their current budgeting process is too long and resource intensive. So organizations are spending all this time and effort, and by the time the planning process is complete, the output is already based on old data.

When it comes to visibility, 21% cite an inability to trace business success to its key components. These organizations do not know which factors have the most impact on performance and cannot necessarily understand how certain actions and economic factors will impact the accuracy of forecasts. Therefore, these organizations must provide decision-makers with real-time access to business performance data.

So how do Best-in-Class organizations tackle the need for greater visibility into data (Figure 2)? Well, it is first important to understand just what the components of business success are and what factors outside of the organization impede or support increased business. Furthermore, it is important to be able to measure and predict the impact of changes in these factors will have. Best-in-Class organizations are over twice as likely as All Others to have the ability to incorporate business drivers into the ongoing forecasting process.

Figure 2: Providing Greater Visibility


Source: Aberdeen Group, January 2013

Top performers are better able to study these business drivers in a variety of ways. Internally, those at the top in Best-in-Class organizations are able to perform multi-dimensional reporting with roll ups. This allows them to drill down to individual departments and compose better informed budgets. This helps the line of business communicate up. Externally, Best-in-Class organizations are 78% more likely than All Others to have the ability to share analytical data with the extended enterprise. There are numerous factors outside of the organization that can have an impact on performance. For example, what happens if an organization projects sales of a certain product and then finds out that a material supplier cannot meet demand? Forecasts will need to be adjusted. Lastly, none of this visibility matters if data is out of date. Decisions made because of old data can actually negatively affect an organization. Fifty-three percent (53%) of the Best-in-Class have real-time updates to financial metrics in comparison to 28% of All Others. Combined, this visibility impacts the accuracy and agility of plans, budgets, and forecasts.

So how does agility impact planning? Since market volatility makes ongoing forecast accuracy difficult and forecasting processes have been known to bring organizations to a stand-still in the past, the majority of organizations have adopted a strategy of rolling forecasts (Figure 3), which involves continuously reforecasting as conditions change. These conditions could be anything from changes in gas prices to the departure of certain employees. This can occur even on a day-to-day basis. The effect that this strategy can have on accuracy is evidenced by the fact that Best-in-Class organizations, which have more accurate budgets and forecasts, are the most likely to have implemented this strategy. Furthermore, the value of performing rolling forecasts is evident due to the impact that the resulting accuracy has on the bottom line. Organizations that perform rolling forecasts saw 10% revenue growth over the past 24 months in comparison to 7% growth for organizations that do not perform them. Additionally, organizations with rolling forecasts saw an 8% increase in operating margins in comparison to a 6% increase for those without over the same time frame.

Figure 3: Best-in-Class Organizations Continually Update Forecasts


Source: Aberdeen Group, January 2013

And how do organizations that utilize rolling forecasts actually execute them (Figure 4)?

Figure 4: Making it Easier to Forecast


Source: Aberdeen Group, January 2013

One way of doing this is by allowing business users to plan ahead. Organizations that enable rolling forecasts are 4.4-times more likely than those that do not to have the ability to perform "what if" scenarios and change analysis. Not only does this allow them to mix and match different possibilities and see how they will impact metrics (enabling accuracy), but it also allows them to build contingency plans that enable them to react immediately when conditions change. Decision-makers can also plan ahead better if they can interact with the data available to them. As such, organizations that perform rolling forecasts are 2.6-times more likely than those that do not to allow business users to create their own reports and charts without relying on IT. This also allows them quicker access to the data they need.

For rolling forecasts to work, the budgeting and forecasting process itself needs to be streamlined. This can be done with budget templates that instruct employees exactly which data they need to put where in order to complete the forecast. Additionally, organizations that perform rolling forecasts are 2.5-times more likely than those that do not to have the ability to assign workflows and resources to the budgeting process. These combined capabilities enable employees to compose the newest iterations of budgets and forecasts as quickly as possible in response to business events.

Visibility and agility are essential tools for effective planning, budgeting, and forecasting. In my next article, I'll discuss how business intelligence tools can provide these key components of budgeting success.

Nick Castellina

About Nick Castellina

Nick Castellina is a Senior Research Analyst for the Business Planning and Execution practice at the Aberdeen Group. His research covers topics such as ERP; Financial Planning, Budgeting, and Forecasting; Enterprise Performance Management; Business Process Management; and the office of the Chief Financial Officer. Castellina also serves a significant role in the development of the Aberdeen Business Review, a research document presenting a comprehensive analysis of technology trends and business performance results from organizations across the world.
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