PLANNING, BUDGETING & FORECAST

Planning, budgeting & forecast are three distinct, highly interconnected processes. Each of them has different goals and needs and, therefore, different requirements in terms of software functionality.

Planning is naturally strategic. It identifies and clarifies the full impact of short and long term alternative business scenarios and strategies. Typically, planning is carried out by a relatively small group of individuals who are responsible for translating high-level organizational goals into a plan. It is usually a precursor to budgeting. Planning refers to possibilities, alternatives, and what-if scenarios. It tries to predict the impact of today’s decisions on tomorrow’s financial results.

Planning is inherently complex because of interdependencies and potential effects of a parameter change. It considers things such as: “If the revenue from a product line decreases, how will it impact the earnings, cash requirements, staff, and capital requirements?” Planning rarely means creating a plan; it means creating many plans based on different possible scenarios: best case, worst case, likely case, scenarios with different revenues, scenarios with different costs, different procurement scenarios, and so on. And even the best designed plans should be constantly reviewed. Uncertain and volatile market conditions may require the modeling of multiple scenarios to compare complex alternatives.

A CPM suite should provide the ability to create the necessary interdependencies and allow comparisons between alternatives. Ideally, the planning process should be well integrated with the budgeting platform so plan data can be used as a source to act directly for the budget. A good planning tool enables a financial user to create complex business rules needed to support data interdependencies in a strategic plan. Of course, many of these rules are likely to be applied to budget and actual data. Another important quality for planning is the ability to easily generate alternative scenarios.

Budgeting is a more collaborative, bottom-up activity than planning. It is the controlled process of translating planning decisions into a detailed and specific action plan designed for the upcoming year that can be used as a guideline for performance. It may involve insertion of data by a large number of employees, often accompanied by a recurring approval process. A CPM suite seeks to ease the complex task of entering data and creating business rules. Most companies place their main efforts on developing a budget. In a good solution, the ability to take advantage of Microsoft Excel functionality is a great convenience, if not an absolute necessity. But conducting the whole process of budgeting through spreadsheets, collaboratively, will result in a fragile, inflexible, ineffective and frustrating activity, to say the least.

The goal of Forecast is to track performance against the plan and provide an accurate look into the future according to budget variations and compliance. To use predictions based on past performance and updated as real performance progresses day by day makes it possible to anticipate the need for budget adjustments. Provides managers with an early warning to reduce or increase expenses to reach budget limits or capitalize opportunities. Forecast periods can go from days to months, but forecasts are made more often in a monthly or quarterly time period. A CPM solution should allow the creation of new forecasts by merging data from several scenarios and should allow managers to enter their insights into the new plan, generally facilitated by the adoption of Dashboards and Reports created for this purpose.

In a dynamic environment, these processes are especially critical and should be particularly agile, flexible, adaptable, transparent and reliable.

About Antonio Dutra Junior

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