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TABLE OF CONTENTS
Budgeting as a Competitive Advantage . . . . . . . . . . . . . . . . . . . . . . . . . 1 Broken Processes & Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Solution: Best Practices and New Technologies . . . . . . . . . . . . . . . . . . 2 Best Practice #1: Make Planning Part of the Corporate Culture . . . . . . . . . . 2 Best Practice #2: Align the Strategic and Operating Plans . . . . . . . . . . . . . . 3 Best Practice #3: Start at the Top and the Bottom . . . . . . . . . . . . . . . . . 3 Best Practice #4: Drive Collaboration between Functions . . . . . . . . . . . . . . 4 Best Practice #5: Adapt to Changing Business Conditions . . . . . . . . . . . . . . 4 Best Practice #6: Model Business Drivers . . . . . . . . . . . . . . . . . . . . . . . . 5 . . . . . . . 6
Spreadsheets: Impeding Best Practices . . . . . . . . . . . . . . . . . . . . . . . . . 7 Alternative Technology Can Promote Best Practices . . . . . . . . . . . . . . . . . 8 The Adaptive Planning Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The corporate budgeting, forecasting, and reporting process presents a formidable challenge to most companies, regardless of size or industry. Budgeting is often seen as burdensome and time consuming. Yet budgeting is also a crucial element of nancial management, which in turn is a huge contributor to a companys overall success or failure. As a result, companies that are able to address budgeting obstacles and improve their process will not only be rewarded with more accurate budgets, more timely re-forecasts, and improved decision-making, but will also foster a disciplined nancial management culture that will deliver a true competitive advantage. Companies can overcome planning challenges and achieve these goals by applying budgeting and forecasting best practices and leveraging new technologies.
By combining best practices with technology, companies can: > Consistently deliver a more timely, accurate, and exible plan. > Strengthen the link between strategic objectives and operational and nancial plans. > Improve communication and collaboration among managers. > Enhance strategic decision-making, enabling leaders to more quickly identify, analyze, and forecast the impact of changes as they occur within and around their business. The result is a company with signicantly improved nancial management and stronger, more competitive business management. This white paper outlines the budgeting, forecasting, and reporting best practices and related technologies that have been adopted by leading companies.
Today, the pace of business change can be rapid, and thus a sluggish planning and budgeting process can be a competitive disadvantage. Companies that can replan and rebudget more nimbly are better able to keep costs in line in difcult economic times, and then are in a better position themselves to take advantage of a recovery. Business Performance Management Magazine
Our study found that companies that believe their budgets are very accurate attribute this to better collaboration more than any other factor. Business Performance Management Magazine
In addition to the qualitative benets that companies achieve through improved planning outcomes, those that use rolling forecasting save a median of 25 days on their annual budgeting cycle. APQC survey
from many sources, including other managers, monthly actual data, and revisions to top-down targets. Finance should be able to quickly consolidate plan data from all areas of the company, and to disseminate new information in real time. This process will facilitate more informed decision-making in areas such as pricing changes, product line changes, capital allocations, organizational changes, and the like.
Signicant, unforecastable changes to the environmentcan happen anytime. Any company can respond to events haphazardly, but those that have the right planning processes in place can respond faster and in a more coordinated fashion. Business Performance Management Magazine
According to a Hackett Group study of planning best practices, the fewer the number of line items, the better the planning practices. Hackett found that world-class companies average 15 to 40 line items in their budgets, compared to highly inefcient companies that averaged 2,000 line items. Managing material content means that a company pays attention to whatever has a real and signicant impact on expenses, revenues, capital or cash ow. This company will: > Avoid false precision. A complex model might not have any more precision than a simpler model. More detail and intricate calculations can lure managers into the trap of thinking their plan is therefore more accurate. > Monitor volatile not stable accounts. Eorts are best spent on uid expenses such as headcount and compensation. > Aggregate accounts. The budget does not need to reect the same level of detail as that in the general ledger. Even if the GL has 15 dierent travel accounts, managers can often plan in one.
decreased cycle times in planning, budgeting, and forecasting processes lead to better business outcomesAssumptions about the business environment or market behavior made 90 days before a budget is completed are much more likely to be incorrect than assumptions made only 30 days in advance. APQC survey
Technology can especially help improve timeliness and accuracy in the area of consolidations. Real-time consolidation removes the necessity to manually process results, leading to a smoother, more consistent, and more accurate planning process. Variance reports delivered within two to four days from the period close allow managers to immediately evaluate their performance against plan, and then eectively adjust their businesses as a result.
heavy spreadsheet usage substantially increases the budgeting and planning cycle time. Those who use spreadsheets extensively take a median of 30 more days to complete their annual budget than do the people who rely less on Excel. APQC survey
At an operational level, this type of planning will be less costly and will produce more accurate results than the processes followed by most companies today. At a strategic level, a companys ability to make timely and sound nancial plans will allow it to provide more credible guidance to stakeholders, and to make better, more informed and faster business decisions.
The spreadsheets defects are behind the difculties organizations have with the [budgeting and planning] process. We therefore advise organizations to eliminate spreadsheets if they want to budget and plan more eectively. Business Performance Management Magazine
These inherent weaknesses undermine the accuracy of the entire planning process. This erodes line managers condence in the process, and reduces their level of engagement. Finance is viewed as pushing a bad product, and the plan loses credibility. Spreadsheets are clearly not the best way to manage a top-notch budgeting and forecasting process.
Leading companies have recognized that spreadsheet-based planning impedes their implementation of these budgeting and forecasting best practices. They have moved to a purpose-built application with lean infrastructure requirements. This type of planning software enables them to accurately plan and re-plan quickly, using the same or fewer resources than they formerly devoted to the process. Streamlining the planning process demands technological tools capable of supporting a faster, more exible, and adaptive approach to planning. By using an on-demand, dedicated budgeting and planning application that is delivered over the web, organizations are able to implement the best practices outlined in this paper. With such software, the planning process can be: > Integrated: Strategic, operating and nancial plans reside in one system. Managers do not need to keep their own planning systems on the side. > Collaborative: Web-based, distributed planning enables anytime, anywhere participation. The ability to use a secure web connection allows everyone to access the budget information at anytime from anywhere there is Internet connectivity. > Adaptive: Simplied version control and the ability to frequently reforecast allow companies to respond to business changes with what if scenarios as often as necessary. > Timely: Information is always current because departmental users contribute directly to a central planning database. Deadlines are more easily met because consolidations and rollups are done automatically. > Efcient: Finance managers and department managers spend less time managing data, and more time managing the business. > Relevant: Customized views for managers increase adoption and ownership. Formula capabilities enable modeling business drivers. > Accurate: Plans contain fewer errors, since broken links, stale data, improper rollups, and missing components have been eliminated.
800 W. El Camino Real, Suite 260 Mountain View, CA 94040 T 650 528 7500 F 650 528 7501 www.adaptiveplanning.com
TABLE OF CONTENTS
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Whats Wrong with Spreadsheets? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data distribution and consolidation is time-consuming and error-prone . . . . . . Analyzing complex business trends is dicult and results are latent . . . . . . . . . Ensuring compliance is impossible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . With spreadsheets, there is never just one set of facts . . . . . . . . . . . . . . . . . . Re-forecasting is infrequent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 3 3 4 5
The Spreadsheet Alternative: What to Look for in a Budgeting, Forecasting, and Reporting Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Adaptive Planning Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Making the Switch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
EXECUTIVE SUMMARY
For years, large companies have reaped the benets of purpose-built budgeting, forecasting and reporting applications. Unfortunately, because such applications are costly and complex to implement, deploy and maintain, mid-sized organizations have not been able to reap the same benets. Instead, these organizations have conducted the budgeting and forecasting process through a readily-available, inexpensive and easy-to-use application the spreadsheet. While spreadsheets are good desktop personal productivity tools, they are not collaborative planning applications. As the planning process extends beyond a single user, spreadsheets fail to support a complex planning process. They were never designed for multiple users. They were not intended to be the foundation of a dynamic, shared function like nancial planning. And they certainly werent designed to provide the security required for nancial information. All companies large and small have complex nancial planning processes. Mid-market organizations should not settle for the limited functionality of simple spreadsheets when their nancial planning process involves multiple people, requires real-time access to data and demands comprehensive security. The good news is that there are excellent alternatives available today. Finance managers should look for a purpose built application, such as Adaptive Planning, that is: > Easy to use > Requires no IT resources for implementation or maintenance > Consolidates budgets in real time, automatically > Enables powerful driver-based modeling and scenario analysis > Facilitates compliance with regulatory requirements > Creates a single data repository for all nancial plans, forecasts, and reports > Scales and expands to the needs of the business > Aordable
Spreadsheets are ne for what they were designed to do provide individual users with a robust tool for data analysis. But many nancial professionals still choose to use spreadsheets as the foundation for their companys budgeting and planning process simply because they are inexpensive and familiar. Using a spreadsheet as the backbone of the planning process is complex, time-consuming and error-prone, focusing the majority of the eort around low value data management and not on high value business analysis and evaluation. And, as organizations grow to incorporate budgeting and forecasting best practices, spreadsheets become untenable. There are many shortcomings of using spreadsheets for the budgeting process. Five primary shortcomings include:
1. Data distribution and consolidation is time-consuming and error-prone. Distributing and consolidating the data needed during the budgeting and forecasting process is difcult, involving multiple steps, each with its own opportunity to introduce errors: > First, the nance manager puts together a master budget spreadsheet. > Next, the nance manager manually segments the master budget spreadsheet into pieces by department, creating multiple smaller spreadsheets for each department manager to view and update. For some organizations, this can mean tens or even hundreds of spreadsheets that must be manually distributed. Links between spreadsheets are easily broken in this process resulting in missed information, inaccurate numbers and wasted time correcting the links. > Third, the nance manager must email the spreadsheet segments to each department manager. As is often the case in a manual process, departments can be missed or a spreadsheet can be mistakenly sent to the wrong department, leading to security breaches, regulatory non-compliance, and time wasted resending the right les. > Next, the nance manager must manually follow up with each department manager to collect the spreadsheets. Inevitably, not all the spreadsheets will be returned on time or the data will be incomplete. > Finally, the nance manager must consolidate each of the spreadsheets back into the master spreadsheet, spending a signicant amount of time ensuring that departmental nance managers use the latest version of the spreadsheets, enter the right data at the right level of detail, and do not break formulas or otherwise alter the spreadsheets.
Companies that rely heavily on spreadsheets typically take 30 days longer to complete their budgets than those that don't. APQC benchmarking survey
This process not only diverts valuable time that should be spent on higher value analysis of the budget and the business, it adds a great deal of risk. And it reduces nancial professionals to data entry clerks. In addition, there is the likelihood that the data is old before it has even been shared. Its not real-time, and therefore, impossible to trust with real certainty.
2. Analyzing complex business trends is difcult and results are latent. Budgeting and forecasting is not just about collecting data, it is also about understanding how the business is running and being prepared for change. When businesses are in ux due to growth, cutbacks, new product introduction, acquisition or divestiture conducting careful scenario analysis becomes critical. But using spreadsheets for such complex analysis quickly escalates from difcult to intractable. Changes in the business mean changes to the structure of the model. This can mean creating new sheets, updating formulas within all nancial statements, modifying reports, and so on. Each structural change takes time and risks introducing errors into the model. And if the change requires input from department managers, it can take days, or even weeks, to develop the new model structure, collect the relevant data, and then analyze it once it has been collected. Such delays make it difcult for businesses to react quickly to changes or to take advantage of business opportunities. The nance department should be empowered to use the nancial model to plan for and react to changes in the company or marketplace. They need to quickly make structural changes to their model. They need access to real-time data so they can quickly act upon trusted, accurate information. Because the spreadsheet-based budgeting and planning process is so time consuming and exhausting, nance managers miss the real information in their eorts to manage the data. The simply cant see the forest from the trees.
More than half (54%) of companies would like to re-forecast monthly or more, and 48% have the need to re-forecast on demand to react to changes in their business. Business Finance Magazine
In a typical planning environment, more than half of all time is spent gathering and re-keying data, which leaves little time for analysis. The average company spends only 16% of their time in the value added activities of explaining the why, and exploring the what if. Hackett Bench-Marking
3. Ensuring compliance is impossible. In the post-Sarbanes-Oxley world, companies of all sizes are facing strict requirements for transparency and data security. Public companies must ensure that they have strong controls around nancial processes. And even private companies are under increased scrutiny from lenders, auditors and investors. A meticulous budgeting and forecasting process is central to the good governance of every company.
Spreadsheet tools were simply not designed for rigorous nancial controls. The limited retrotting that has been done such as adding passwords to spreadsheets or attempting to limit which portions of a spreadsheet are editable are the worst kind of half-measure. They do not accurately address compliance issues, but rather make the entire process more cumbersome and difcult for everyone involved.
30 to 90 percent of all spreadsheets suer from at least one major user error. The range in error rates depends on the complexity of the spreadsheet being tested. In addition, none of the tests included spreadsheets with more than 200 line items where the probability of error approaches 100 percent. The Journal of Property Management
With spreadsheets, organizations face numerous compliance-related risks, including: > Data security Because there is little to no security inherent in a spreadsheet model, they make it virtually impossible to ensure that the data has not been tampered with, viewed by unauthorized individuals within the company or worse forwarded to others outside the company. > Data inconsistency Multiple versions of spreadsheets oating around in email make it difcult to ensure that analyses are performed on the most up to date nancial plan or forecast. > Audit trails Spreadsheets lack audit trail capabilities that allow nancial managers to see who made changes and when.
4. With spreadsheets, there is never just one set of facts. Getting everyone in the organization on the same page is not just a good idea; it is a nancial best practice. Operating with critical information scattered around the organization in spreadsheets is a virtual guarantee that at least some key members of the management team will be working from old, out-of-date numbers.
In a survey of 168 nance executives, 33 percent of respondents with revenue under $100 million say that spreadsheet hell is a fair description of what goes on in their departments. That gure jumps to 59 percent for larger companies. CFO IT
Does everyone have the latest headcount forecast? Are they hiring to the current targets? Ordering the correct amounts of raw materials? Planning to support the agreed to number of sales representatives? Looking at a budget spreadsheet in an email inbox, or on a hard drive, does not allow a departmental nance manager to tell whether a spreadsheet is the latest and greatest or the one from last week. It is only a matter of time before someone generates a plan based on the wrong set of numbers. And only a matter of time before the impact of that mistake is material.
5. Re-forecasting is infrequent. Annual budgets are no longer enough. In todays competitive, dynamic market, rolling forecasts revised monthly, quarterly or at least semi-annually are key not only to understanding the companys current nancial situation, but also its future. The market, competitors and economy change constantly. Companies must have a plan to anticipate these changes, which are an undeniable part of the budgeting process. But clearly the process with spreadsheets is just too time consuming. Finance must be able to quickly reforecast and engage department managers in that process. Surveys consistently show that nancial managers would like to reforecast more frequently but fail to due to the time and eort associated with a spreadsheet-based process. Its clear that spreadsheets a 30-year-old technology are not up to the task of budgeting in todays dynamic companies. Large companies have known this for years and have standardized on a number of enterprise solutions Hyperion, Cognos, and Cartesis to name a few. But the lengthy implementation times, high costs and large stas required by these solutions make them ill-suited to mid-sized companies. What alternatives do these organizations have?
Despite its ubiquitous nature and popularity as a planning and budgeting tool, spreadsheet software alone has proven to be poorly suited for enterprise planning processes. Forrester Research
THE SPREADSHEET ALTERNATIVE: WHAT TO LOOK FOR IN A BUDGETING, FORECASTING, AND REPORTING SOLUTION
While it is clear that spreadsheets are not the right way to manage the budgeting and forecasting process, there is a confusing array of new purpose-built solutions targeted at the mid-sized company. These organizations should evaluate several criteria in their eorts to replace spreadsheets and select an application that best ts their needs. These criteria include: 1. Easy to use 2. Requires no IT resources for implementation or maintenance 3. Consolidates budgets in real time, automatically 4. Enables powerful driver-based modeling and scenario analysis 5. Facilitates compliance with regulatory requirements 6. Creates a single version of all nancial plans, forecasts, and reports 7. Scales and expands to the needs of the business
With Adaptive Planning, departmental users contribute their input to the central budget. There arent separate spreadsheets and subsets of data scattered around. And theres no button to push to consolidate the system does it automatically and continuously. 4. Adaptive Planning provides powerful, scenario-based analysis. Growing businesses those that are introducing new products, expanding geographically and through acquisitions, and being driven to change by competitors need to be able to design business nancial models based on key drivers and create scenario analyses on a moments notice. Adaptive Planning gives mid-sized companies the most powerful scenario planning tools available, with the ability to create and modify scenarios dynamically, quickly compare scenarios against each other, and lock scenarios and create baselines for later reference and variance reporting. 5. Adaptive Planning ensures compliance. Adaptive Planning was built with compliance in mind. Adaptive Planning inherently protects companies against the issues that spreadsheets can often complicate, like data security, version control and audit trails. In addition, Adaptive Planning provides a critical compliance capability that simply doesnt exist with spreadsheets the ability to drill down into specic numbers to nd the root data and ensure its accuracy. 6. Adaptive Planning delivers a single version of the truth. A centralized, database-driven system inherently eliminates the need for multiple versions and confusing data. With Adaptive Planning, everyone across the company from department level managers to the executives always have instant access to the most current information. They will never need to verify numbers or compare versions, and most importantly, they will never plan and execute based on inaccurate information, an outdated strategy or a rejected budget. 7. Adaptive Planning is expandable and scalable Businesses change rapidly, and the budgeting, forecasting, analysis and reporting solution must be able to keep up. Adaptive Planning protects organizations from change. Model structures are managed centrally, making it easy to react to changes in the business or the underlying assumptions. Departments can be added on the y and users can be added as the organization grows, all within an easy to use administration interface.
800 W. El Camino Real, Suite 260 Mountain View, CA 94040 T 650 528 7500 F 650 528 7501 www.adaptiveplanning.com