Magazine article Strategic Finance

Reaching for Financial Success: Companies Must Synchronize Budgeting and Planning with Fast-Changing Business Operations to Stay Financially Viable

Magazine article Strategic Finance

Reaching for Financial Success: Companies Must Synchronize Budgeting and Planning with Fast-Changing Business Operations to Stay Financially Viable

Article excerpt

What happens when a company experiences a dramatic, rapid change in its business environment? As market conditions change dramatically within a single planning period, budgeting and planning forecasts--and the financial plans they produce--can quickly become misaligned with actual business conditions, even as these forecasts are finalized.

Most businesses haven't built models to anticipate these radical changes. They also haven't fully synchronized their financial planning with their budgeting process. Compounded by Wall Street's high-powered focus on accurate forecasts, companies simply can't afford to set financial goals only to have no means of measuring progress toward those goals until the end of the quarter!

To stay financially viable, corporations must bridge the gap between the quickening pace of business operations and the much slower rate of the traditional financial planning and budgeting process. To accomplish this, they should tightly integrate their business planning and budgeting applications into a single solution while extending collaboration capabilities beyond the walls of the finance department. Going one step further, companies should consider integrating this single solution with other ERP systems, including customer relationship management (CRM), supplier relationship management (SRM), and human capital management (HCM). For example, direct links to a company's HCM systems can bring real-time employee and compensation information into the planning solution. This information can then be coupled with detailed customer profitability information from their CRM applications for accurate revenue forecasting.

THE NEED FOR INTEGRATION

A financial plan built on static data is inflexible and unrealistic. The fact is our external business environment is constantly evolving every day. Competitive companies must possess the adaptability and agility to identify and align plans to a dynamic market. Budgeting needs to be tied directly to planning so that as financial plans morph, budgets morph accordingly.

Right now, planning is often a top-down spreadsheet exercise, while budgeting is a bottom-up spreadsheet exercise--and often they don't meet in the middle. By connecting the two processes with an enterprise software solution, organizations save time by deploying resources more effectively and preventing multiple iterations of business plans and budgets. They are also able to manage performance more effectively by dynamically assessing company performance against plans and budgets. By generating updated rolling forecasts based on current market information and actual results, companies can take corrective action or make adjustments to plans in real time.

An example of real-time distributed information is when Key Performance Indicators (KPIs) and management dashboards are developed and distributed through a portal to management. These KPIs should be developed from the same source of enterprise data that the planning and budgeting processes are part of to ensure the consistency of the financial information.

Consider, for example, a bank that creates a financial plan and operations budget based on increased commercial lending in the second half of the year, but the "recovery" never happens. Instead, mortgage and home equity loan activity shoots through the roof. Without the flexibility and agility gained from access to real-time operational data, the budget for increasing the commercial loan portfolio is in the corporate bank while the activity is in the mortgage bank. The overall bank now has a mismatch of resources to loan activity. When the goals for the quarter aren't met three months later, the finance department analyzes the cause and alerts management, who then makes the necessary changes. Meanwhile, the bank misses its numbers for the quarter, and by the time it hires, trains, and adjusts resource allocations, the market is changing again.

With integrated planning and budgeting, the bank instead gains increased intelligence and agility in realigning budgetary assets to new business imperatives in real time. …

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