Trends in Budgets &

Forecasts

Tim Richardson

B.A. (Linguistics), B. Sc (Com Sci), M. Acct, CPA, CPIM

Worked in Indonesia, Singapore, Central & Western Europe. Raised in Mansfield 🏔

Founder, GrowthPath, integrated cloud solutions for SMEs up to $25m

Finance Director for two global manufacturing businesses, Philips Lighting

Controller, European Retail for Lighting

CFO of a $70m online business

IT developer ERP/MRP, business warehouse, API-based integrations

Key trends behind decision making

• Business change much faster, new ways of organising

the enterprise emerging

• SME sophistication growing rapidly

• Much more non-accounting information business-critical

• Increasing IT, modelling and decision science skills seen

at all levels of management

Key questions

How much does budgeting/forecasting matter?

Is it working?

What should we do, what should we expect?

Definition of the budget

Big process:

• gathers competing interests

• mediates/dictates one plan of what the business should

do,

• defines & measures good/bad performance

• justifying responses to real-world event

Budgeting vs Forecasting

Budgeting implies an internal focus, often on costs (e.g. departmental

budgets).

“Forecast” is more likely to refer to scenarios, allocating resources and

achieving strategic goals.

There is a growing appetite for the second version in SMEs.

Why do we budget?

1. To communicate objectives and coordinate actions

2. To wisely allocate resources (which teams & projects get

what)

3. Are we on-track? Guide responses.

4. Reward good management

5. Show shareholders, lenders, stakeholders that we are in

control of assets & compliance.

How are we doing?

Typically, budgets are weak at allocating

resources, weak at communicating priorities

and poor at diagnosing deviations

Prone to poorly designed incentives when used

to motivate behaviour

The budget process

largely defines what

finance does...

True or False?

How does the budget define the role of

finance?

The way we budget affects the way we report,

analyse, assess performance, diagnose and

respond.

It largely defines the tools used by finance, the

type of data it collects, and the influence it has.

Some strengths of traditional budgeting

• The tools are easy, well supported in software, and

consistent across organisations

• Low tech

• Business lingua franca: recruits hit the ground running

• The process and outcomes are well understood all over

the business.

The assumptions of the traditional process

1. Accounting numbers are good measurements

2. Historical performance is a strong guide to the future

3. The process is rational and transparent, with everyone

acting in the best interest of the entire organisation

4. Months are the ‘seconds’ on the business decision-

making clock (the smallest unit of time)

Accounting numbers

+ easy to measure. They are quite objective and consistently defined.

- But they are not very predictive, and they are not very diagnostic.

They don’t provide much focus or reveal priorities.

They are divorced from the competitive differences which drive customer

behaviour, and they are not well linked to management decisions and plans.

14

Traditional budget

The role of senior

management

Points of difference

Competitive Advantage

Barriers to entry

Plan,

Objectives

Operations Business Control

STRATEGY

Budget/forecast in a

position of influence

How to manage change to the budget/forecast

process

Budgeting is a very old institution

It is very political, since it affects who gets what (this is a

sign that it matters, it’s not a bad thing)

These are signs of a hardy, change-resistant process

Technically-based changes are more likely to succeed over

politically-based changes

What today’s business needs

• More scenario focused, so numbers support decisions even several

times per week

• Focus on drivers and real objectives of the business

• Interfacing with realtime events [e.g. website analytics]

• [... increasing pressure on continuous disclosure...]

• More diagnostic

• An analytical infrastructure as opposed to reporting on numbers

Complaints about budgeting are not new

• Process is too long

• Too slow with outputs, guaranteed to be stale

• Insights are not actionable

• Impedes flexible response, the complete

opposite of modern management requirements

In the slides

• A brief discussion of two older responses to

traditional budgeting

Beyond Budgeting

• Activity Based Costing

Balanced Score Cards

A 20-year old response which is source of

powerful insights about a better budget/forecast

approach

Balanced Scorecard: Major innovations

• Make leading indicators first-class citizens

• Big focus on innovation process and

customers

• Big focus on the one-page dashboard

(maybe the inventor)

Targets and reporting should be in 4

groups of KPIs

only one of which is traditional accounting.

The other groups are

• Innovation (often called Learning and

Growth)

• Your market [‘Customer’]

• Cost-control [‘Business Processes’]

Each group has only max 4 measurements

Four is a “golden number”: it is hard to choose only 4 KPIs for each of

these important sectors

So you are forced to prioritise, which is extremely valuable and even

more relevant today because the cost of generating KPIs is almost $0

Financial Market Value

Revenue per Seat

Lease, avg finance rate

Free Cashflow

Customer FAA On Time Arrival Score

Customer Net Promoter Score

Customer Repeat Rate

Process Time on Ground per turnaround

On Time Departure

Learning,

Innovation,Alignment Ground crew, % Spanish/English bilingual

% seats Inflight Sytem 21 deployed

Ground crew, % stockholders

You can walk into a room,

and in a minute or two it’s

clear what management is

focusing on (and how it is

doing)

This is a remarkable

achievement.

I rate Balanced

Scorecards very highly.

A signpost to the future

The Balanced Scorecard is the best precursor to

modern approaches

It nailed the use of non-accounting leading

indicators, simplicity and focus, and visual

representation of data

The future of budgeting requires balancing

the

pressures

for change

Opportunities:

(1) new tools

wider numeracy

& analytical

skills in the

organisation

Opportunities

1. Much more technology and technological

literacy

2. New ways of working

How is technology impacting budgeting?

1. Massive amounts of data are now “surfaced”

via integrated IT and big data tools.

2. Expectation of faster, more interactive, more

available everything

3. The technology industry is itself driving new

types of business structure: Agile, Uber...

How is technology impacting budgeting?

• Big Data: Businesses can now process massive amounts

of data (example real-time register sales, geolocation data)

• Management is getting more sophisticated in the use of

analytical IT: being an Excel expert is increasingly less

relevant. Who knows MDX and R, Hadoop...

• Predictive analytics: patterns of correlation and leading

indicators can be found.

Modelling, Forecasting and Budgeting will

merge

Budgeting will be built on models using business drivers.

It will be multi-scenario, and much more closely linked to

forecasting, decision making and non-financial information

Hidden in the slides ...

An introduction to building budgets on the basis

of business drivers

Big-data & management accountants

The US accounting industry expects:

Finance skills sets will changeSearch US job ads for “data scientist”

PwC said accountants at the most at-risk job for being automated out of a job

(97.5% chance). Ahead of checkout staff! Another study said 94%, 2nd place.

Data becomes an critical asset which needs to be monetised and

secured

Embedded PDF

For a case study of what happens when

accountants stand still, see:

https://goo.gl/OG0K2Z

New Tools

New tools are new incredibly cheap.

This is not an IT presentation, but for e.g.

search for ”AWS Redshift marketplace” to see

how cheap big data solutions are

New tools: Visualisation

Data visualisation is not

new but it is increasingly

easy and interactive.

Become good at this.

Read Edward Tufte

New organisation models

• The public/non-profit sector will growing in

size so its influence will grow*

• Management attention and economic activity

is moving to the hyper-innovative, disruptive

models

* but I don’t know what this will mean ... it could go different ways

What is Hyper-innovation?

After around 20 years, a consensus approach

has emerged to suit extremely disruptive

markets with breathtaking speed to market

Google, Facebook, Uber, Airbnb, Xero,

Airtasker, ....

Extremely analytical businesses

These new businesses are extremely data

driven.

If you see Finance as a powerhouse of

modelling and analysis, there is a lot to like.

Going to market: What needed to be fixed?

The traditional product development approach in software

has been the "waterfall" approach.

Define what you want (top of the waterfall) and proceed

one-way through distinct phases until the product is ready.

This is also true of the ponderous budget.

Response: Agile methodology

• Fast development, rapid releases

• The team constantly goes back to the market to observe customer

and competitor behaviour. Much more user involvement

• It is very focused on meeting deadlines, less focused on what gets

delivered. Never finished. Fan of kanban, a lean-supply-chain idea.

Project management is surprisingly low-tech.

Agile is being

adopted by

large, non-tech

businesses

See: “PwC Global PPM

Survey”

What does it mean for Finance if an

organisation adopts Agile for projects?

• More projects, budgets and business cases with a shorter time

frame.

• Metrics which are customer-focused, not traditional.

• More complex mix of personnel costs

These are all very manageable.

Finance has an opportunity to help agile project teams take longer term

views of their project, and to help model market behaviour.

Budget/forecast maturity model

Hidden in the slides:

A simple maturity model to evaluate your

organisation’s model

Summary:

Increasing numeracy across business, particularly dramatic

in SMEs

Cost of advanced tools falling fast ($100 a month for BI)

Disruptive business models

... Driving faster, more focused decisions

The role of the management account

The way organisations allocate resources,

measure performance and diagnose deviations

can get enormously better.

This is the traditional remit of the

controller/CFO.

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Twitter: growthpath_au

tim@growthpath.com.au