Most organizations have a budget committee comprising CEO, CFO, and two general managers. You need to persuade this budget committee that a three day lock-up, whereby the committee sits for up to three days,  is more efficient than the current scenario that stretches over months.

During the three day lock-up each budget holder has a set time to:

• Discuss their financial and nonfinancial goals for the next year
• Justify their annual plan forecast
• Raise extra funding issues
• Raise key issues (e.g., the revenue forecast is contingent on the release to market and commissioning of products X and Y)

The CEO needs to make a fast time frame non negotiable in all communication with staff.

From the memo that goes out to invite Budget holders to the first annual planning workshop, the address of the attendees at the workshop, and the daily chasing up of the laggards during the three days Budget holders have to complete their annual plan the message is clear .  We want a ‘fast light touch’ annual plan.  ‘Fast’ in that the annual plan is completed in less than two weeks and ‘light touch’ in that unnecessary detail is avoided.

As part of this foundation stone, common templates are established to replace the myriad of spreadsheets.

The calendar in use today can be a major hindrance in forecasting. With the weekdays and number of weekend days, in any given month, being different from the next month, forecasting and reporting can be unnecessarily compromised. Closing off the month on a weekend can make a big positive impact in all sectors.

Forecasting models should be based on a “4, 4, 5 quarter”; that is, two four-week months and one five-week month are in each quarter, regardless of whether the monthly reporting has moved over to this regime. Calculating and forecasting the following items then becomes easier:

• For retail, you either have four or five complete weekends (the high-revenue days).
• You have either four weeks of salary or five weeks of salary.
• Power, telecommunications, and property-related costs. These can be automated and be much more accurate than a monthly allocation.
• Monthly targets. You can simply adjust back based on calendar or working days.

Simply design the model so that smoothing back to the regular calendar can be removed easily when you decided to migrate reporting to 4- or 5-week months.

To make progress in this area, I recommend to that you contact your general ledger supplier and ask, “Who is a very sophisticated user of this general ledger and who uses 4, 4, 5 reporting months?” Arrange to visit them and see how it works for them. Ask them, “Would you go back to regular calendar reporting?” Most are likely to give you a look that says, “Are you crazy?”

The annual plan should not create an entitlement, it should merely be an indication, the funding being based on a quarterly rolling basis, a quarter ahead  each time.

Asking budget holders what they want and then, after many arguments, giving them an ‘annual entitlement’ to funding is the worse form of management we have ever presided over.

Organisations are recognising the folly of giving a budget holder the right to spend an annual sum, while at the same time saying if you get it wrong there will be no more money.  By forcing budget holders to second-guess their needs in this inflexible regime you enforce a defensive behaviour, a stock piling mentality.  In other words you guarantee dysfunctional behaviour from day one!

The nine year old’s birthday cake

The annual planning process has a lot in common with the handling of a nine year old’s birthday cake.  A clever parent says to Johnny, here is the first slice, if you finish that slice, and are not going “green around the gills” and want more, I will give you a second slice.  Instead, what we do in the annual planning process is divide the cake up and portion all of it to the budget holders.  Like 9 year olds, budget holders lick the edges of their cake so even if they do not need all of it nobody else can have it.  Why not, like the clever parent, give the manager what they need for the first three months, and then say “what do you need for the next three months” and so on.  Each time we can apportion the amount that is appropriate for the conditions at that time.

A forecast is a view of the future. It will never, can never be right.  As Harry Mills says it is better to be nearly right than precisely wrong”. Looking at detail does not help you see the future better, in fact I would argue it screens you from the obvious.

Whilst precision is paramount when building a bridge, ever small detail needs to be right, an annual plan should concentrate on the key drivers and large numbers.

Following this logic it is now clear that as accountants we never needed to set budgets at account code level. We simply have done it because we did it in the previous year.  Do you need a budget at account code level if you have good trend analysis captured in the reporting tool? I think not. We therefore apply Pareto’s 80/20 and establish a series of category headings which include a number of general ledger (G/L) codes.

Rules I have developed:

• budget for an account code if the account is over 10% of total expenditure or revenue e.g. show revenue line if revenue category is over 10% of total revenue.  If account code is under 10% amalgamate it with others until you get it over 10%.  I call these categories.  Thus a category will have a number of account codes within it.  See Exhibit 2 for an example.
• limit the categories that BH’s need to forecast to no more than twelve
• select the categories that can be automated, and provide these numbers
• map the G/L account codes to these categories – a planning tool can easily cope with this issue without the need for a revisit of the chart of accounts.

Annual planning requires a good robust tool not a spreadsheet, built by some innovative accountant, which now no one can understand.  Often the main hurdle is the finance team’s reluctance to divorce itself from Excel. It has been a long and comfortable marriage albeit one that has limited the finance team’s performance.

Acquiring a planning tool is the first main step forward, and one that needs to be pursued not only for the organisation’s future but also for the finance team members’ future careers. It will soon be a prerequisite to have planning tool experience, and conversely career limiting to be an Excel guru.

Excel is a great tool for a one-off costing estimate done while awaiting your plane.  It is not and never should have been a building block for your company’s key financial systems.  As an annual planning tool it fails on a number of counts:

• it has no proper version control, we have all burnt the midnight oil pulling our hair out wondering whether all spreadsheets are the correct versions!!
• for every 150 lines there is a 90% chance of a logic error (from a recent study)
• its lack of robustness (show me a CFO who can be confident of the number an Excel forecast churns out!)
• it cannot accommodate changes to assumptions quickly e.g. what would you do if the CEO asking ”what if we stop production of computer printers, please tell me the impact by close of play today”, I suspect the best thing  would be to pray!
• it is designed by accounting staff who; are not programmers, have not been trained in system documentation, quality assurance etc which you might expect from a designer of a core company system.

New planning tools are being built all the time and this table, on Exhibit 3 is certainly out of date at the time of you reading it.  The table is not intended to be a comprehensive list as this would be a paper in itself.  The following “search strings” will help unearth many applications:

• “planning tools”
• “quarterly rolling forecasting” + “applications”
• “forecasting tools” + “rolling”

The key steps to making a good selection process include:

• workshop the QRF process using a focus group
• seek approval of draft proposal from the focus group
• research planning tool providers and prepare a short list thus avoiding a request of information (RFIs) unless you want to handle over 60 RFIs
• establish selection criteria and issue RFP on preferred three suppliers
• organise testing of the best two planning applications by contracting the consultants to model some of the required key features. Both teams should be paid a set fee so that you can keep the intellectual property developed
• presentation to decision makers and the focus groups