Best Practices in Budgeting & Rolling Forecasts · Best Practices in Rolling Forecasting and Budgeting seminar ... Financial Performance Management Consultant ... SAP HR DW The Challenge

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Business Analytics

Welcome

Best Practices in Rolling Forecasting and Budgeting seminar


This morning’s agenda

9:30 Welcome & Introduction

Andy Nelmes, Program Director, FPM Product Management,

Business Analytics, IBM

9.45 Forecasting in Turbulent Times

David Morton - Financial Performance Management Consultant

11.00 Coffee

11.20 Best Practices in Implementing a Rolling Forecast


12.00 IBM Planning Analytics demonstration

Colm Kenneally - Financial Performance Management Technical Sales, IBM

12.30 What do the latest research findings from FSN say about Planning,

Budgeting and Forecasting?

Gary Simon, Chief Executive of FSN* and Leader of the FSN Modern Finance

Forum on LinkedIn

1.00 Lunch (close 1.45)


The worlds largest

Taxi company…

Owns no vehicles.

The worlds largest

accommodation company…

Owns no real estate.

The worlds largest

Retailer…

Carries no inventory.

The worlds largest

Media company…

Creates no content.

Disruption is upon us

3


- David Christopher Morton, Financial Performance Management Consultant

Forecasting in Turbulent Times


The technologies that CxOs expect to revolutionize business tomorrow are already in play today

CFOs’

opportunity:Be the agent

of innovation and

profitable growth

SecuritySecurity has emerged to become the top risk . 1

Social businessContent collaboration in the public cloud is expected to experience a strong

CAGR of 23.1%, while on-premises growth is flat at 0.8%.3

Next-generation analytics"By 2020, predictive and prescriptive analytics will attract 40% of enterprises'

net-new investment in business intelligence and analytics“. 2

Big dataThe digital universe will grow to 1.8 zettabytes (ZB) in 2011, up 47 percent

from 2010 and rocketing toward more than 7 ZB by 2015.3

Mobile enterpriseBy 2018, 5 million people will have enterprise-confidential information on

their smart watches . 2

Cloud computingBy 2018, 50% of the applications running in public cloud

environments will be considered mission-critical. 2

1 IBM 2015 C-Suite Study.

2 Gartner

3 IDC


CFOs report they use sophisticated, enterprise-wide tools to support Finance one-third of the time

Intuition Spreadsheet ERP Analytic tool

14% 52% 19% 15%

50% 100%0%

Capabilities/tools used to support Finance

Source: Question CFO6--What capabilities / tools does your organization use for the following activities?


“For 55 percent of companies,

their budget assumptions are

useless by three months into

the new year.”

Feb

2012

Budget

approved

Speed and agility do not match the marketplace volatility

Dec

Forecast Forecast Forecast

Jun

Source: APQC

2013 Budget


Staff leverage is weak

Providing value-added

analysis

Collecting and validating the data

Administeringthe process

30%23%

47%

Source: APQC


Forecasting has never been a more critical process......


Plan/ Budget is what we

would like to happen

Forecast is what we

think will most likely happen


A good example of forecasting

http://www.bbc.co.uk/weather/

▪Fact based

▪Forward looking

▪Flexible

▪Greater detail for nearer term

▪Focused on risks and opportunities

Admiral Robert Fitzroy(1805 – 1865)


„The end result ... is not an

accurate picture of tomorrow,

but better decisions about the

future.“Peter Schwartz, The Art of the Long View


The traditional approach...

J F M A M J J A S O N D

En

d o

f Y

ea

r


The traditional template?


How many spreadsheet links?

http://www.clusterseven.com


Opportunities in Forecasting

▪What are you currently using to prepare your budget?

▪What are some of your biggest challenges?

▪What is the reputation of the forecast process in your

company?

▪What would you like to improve?


Does the Budget process have value?

"We used to have what we called the annual plan, and we'd

spend six months of the previous year putting it together,

as soon as the budget was approved it was out of date. So

we decided to do away with it.“Neal Vorchheimer,

Senior vice president of finance for North America

UNILEVER

(CFO magazine May, 2011)

http://www.cfo.com/printable/article.cfm/14570220


Best Practices in implementing Rolling Forecasts


What is a Rolling forecast

J F M A M J J A S

O N D J F M A

M JQ1 Forecast

Q2

Q3

Traditional

forecast

Q1 Forecast

Rolling

forecast


Some key points:

• Consistent time horizon

• Reduced reliance on outdated budgets

• Faster budgets

• Higher likelihood of objective forecast as focus on year-

end is reduced

• Increased business awareness...more to come on drivers

etc


Top Performers Planning vs Peers

Hackett Group - Global EPM Study 2011


Companies who have reduced reliance on annual budgets and changed to rolling forecasts include:

▪American Express, American Century Investments, Bank of

Scotland, Credit Lyonnaise, Svenska Handelsbanken,

Clements International.

▪Unilever, Brown Boveri, Belron, Borealis, Electrolux, Ford,

Volvo.

▪Cisco Systems, Microsoft.

▪Norton Lilly International, DHL, Federal Express.

▪British Petroleum, Shell, Statoil.


There are several success factors

Time Horizon Participation Modeling

Risk &

Uncertainty MeasurementCulture


„A rolling forecast is a 12 month quarterly process.“

No, it depends on your business!


Match the time horizon to the rhythm of your business

Short cycles

▪Consumer electronics

▪Retailing

▪ Investment banking

Long cycles

▪Oil exploration

▪Pharma development

▪ Infrastructure investmentInd

ustr

yF

unctio

n

▪Advertising

▪Cash flow

▪Overtime

▪Plant construction

▪ Infrastructure investment

▪Research & development


An example….

Economic

relevanceVariability Speed of

response

Revenues High High High

Labor costs High Low Medium

Fuel costs High High Medium

Maintenance spending Medium Medium Medium

Advertising spending Medium Medium High

Aircraft ownership costs Medium Low Low

Airport rates and charges Medium Medium Low

Other operating Medium Medium Medium

Update frequency

Forecasthorizon

Daily Quarter

Twice monthly Six months

Weekly Quarter

Twice monthly Six months

Monthly Six months

Quarterly Year

Weekly Six months

Twice monthly Quarter


Common Time Horizon decisions*

▪Airline: Rolling 2 quarters; monthly

▪Semiconductor: Rolling 2 quarters; twice per quarter

▪Automotive: Rolling 2 quarters; quarterly

▪Chemical: Rolling 2 quarters; monthly

▪Telecom: Rolling 4 quarters; monthly

▪Technology: Rolling 4 quarters; quarterly

▪Engineering: Rolling 6 quarters; quarterly

▪Consumer goods Rolling 6 quarters; monthly

▪Pharmaceutical Rolling 6 quarters; quarterly

* The Hackett Group 2008


An example of the time horizon decision


„Best practice companies are moving towards more

frequent & event-drivenupdates.“


But this typically requires a continous collection process

Infrequent &

Manual

Continuous &

Automated


New

version

Update

Models

Load

Actuals

Distribute

Models

Collect

Data

Aggregate

data

Report &

Analyze

What-if &

Optimize

SAP

HR

DW

The Challenge



Time Horizon Participation

Measurement

Modeling

CultureRisk &

Uncertainty


Who creates the forecast?



High participation creates value.

Sales

Marketing

HR


And let’s not forget!

Accountability

Transparency



Time Horizon

Measurement

Participation Modeling

CultureRisk &

Uncertainty


Remember this model?


Can we answer critical questions with this information?

● Risk

● Opportunities

● Customers


“What they needed to identify were the volume drivers, those that influenced 80 percent of the numbers. This turned out to be only fifteen lines on the profit and loss statement.”

Gary Crittenden –CFO of Amex when they implemented Rolling Forecasts

Focus on the critical few, not the routine many


A simple test for selecting the right items


The same applies to your time horizon

Today … Hourly Forecast

3 days time … every 3 Hours

5 days time … day and night



Do YOU forecast and plan like this?


Probably not......you think about events & intiatives

SummerVacation

Plane Tickets£550

Hotel£430

Food£260

Entertainment£300

HomeImprovement

Lawn Mower

£950Fertilizer

£50New Appliance

£700

MonthlyExpenses

Food£760

Utilities£950

Other£320


Think about initiatives

List potential tactics

Screen the most

promising

Watch for infeasibilities

Benchmark to identify

opportunities


The language of our forecasts need to change

634172 – Revenue (New Accts)

665891 – Office Supplies (Paper)

665892 – Office Supplies (Pens)

677199 – Gifts, Misc.

VS.

Campaigns

Pipeline

Number of employees

Customer Satisfaction


Revenue?



Time Horizon

MeasurementCulture


Risk &

Uncertainty


The Forecast?


PlaceYour Bets

What if?

What if?

Considering Uncertainty


But developing scenarios can be very tedious

• Multiple scenarios

• Floating assumptions

• Data volumes


Consider a simpler approach

Upside ExceptionsBase Case (most likely)Downside Exceptions


Consider a simpler approach


1,000 6001,400

Volume

Risk analysis based on statistical models

▪New product

▪Estimated demand: 1,000 units +/- 10%

▪Order: 1,000 units

▪Most likely profit margin: $10

▪Estimated Profit?

A.$10,000

B.More then $10,000

C.Less than $10,000

$10

Margin

$11


Risk analysis based on statistical models

World of Watson 2016 57

The leaders are ahead in using

advanced analytics for decision support

Usage of Predictive / Prescriptive Analytics

1.4X

1.5X

1.5X

2.5X

2.1X

1.7X

2.1X

Source: IBM Market Development & Insights, Finance Analytics and Cognitive Customer Research, June 2016

Financial planning and budgeting

Cash forecasting

Profitability / margin analysis

Enterprise risk management

Fraud, waste & abuse

New products / services identification

Mergers & acquisitions

All others

Most effective Finance organizations

33

%

46

%

46

%

42

%

38

%

34

%

32

%

23

%

30

%

29

%

15

%

16

%

19

%

11

%



Time Horizon

Measurement


CultureRisk &

Uncertainty


Nice forecast. But I don‘t

like the revenue numbers.

They are too low.

But this is the most

realistic estimate I can

provide!

Please go back to your

office and come back

with new numbers.


Sandbagging?

… to intentionally understate one's strength,

with the intention of deceiving one's opponents into overreaching.

http://sandbaggersanonymous.blogspot.com/2006/12/what-is-sandbagging.html

http://sandbaggersanonymous.blogspot.com/2006/12/what-is-sandbagging.html


Is there evidence of sandbagging?

Source: ACCA Webinar Mar 26, 2013. 649 responses


A typical case of sandbagging: Revenue forecast

Forecast substantially

lower than Actuals


Management sets the tone

“Okay, clearly things have changed.

• What are the drivers of the change?

• What is the impact on our business?

• What actions should we be taking?”

“Why didn’t we anticipate

that in the budget? Who

screwed up?”


“The forecast’s key role in

management of the company means

it must be brutally honestwhether we like what we see or not.”

Bjarte Bogsnes, Project Manager, Statoil


A different approach is often required

Purpose of the

Forecast

Assessment of your

processes

New Compensation

Approaches



Time Horizon

Measurement


CultureRisk &

Uncertainty


Some measures you should consider


Forecast Accuracy – Select the appropriate term

Month 1 Month 3Month 2

Forecast – 2 months

Actuals – 1 month

Forecast – 1 month

Actuals – 2 months


Forecast Accuracy - useful in different ways

Discover potential bias

Time

{ 5% gap

Model issues

Attention


Consider using a Run Chart

Forecast Accuracy - error


Forecasting Accuracy

Hackett Group - Global EPM Study 2011



Time Horizon

Measurement


CultureRisk &

Uncertainty


Rolling Forecasts are not a silver bullet

▪No one-size-fits-all approach

▪Forecast culture required

▪Changes to models required

▪Technology upgrades


Recommended reading

„Beyond Budgeting“

Jeremy Hope &

Robin Fraser

„Best Practices in Planning and

Performance Management“

David Axson

„Future Ready“

Steve Morlidge &

Steve Player „Beyond Performance

Management“

Steve Player &

Jeremy Hope


Next steps

Review the summary documents

Assess the process of your company

Join our other events to learn more about IBM Cognos solutions

http://www-05.ibm.com/uk/analytics-customer-event/

Look at the IBM Global C-suite Study

https://www-935.ibm.com/services/c-suite/study/studies/cfo-study/

http://www-05.ibm.com/uk/analytics-customer-event/

https://www-935.ibm.com/services/c-suite/study/studies/cfo-study/








11.00 Coffee








Forum on LinkedIn



Planning Analytics demonstration








11.00 Coffee








Forum on LinkedIn


Best Practices in Rolling Forecasting and Budgeting Seminar 23rd February 2017

0

10,000

20,000

30,000

40,000

50,000

60,000

2014 2015 2016

Membership Growth

Members

Gary SimonChief Executive FSN

& Leader of the Modern Finance

Forum

The Future of Planning, Budgeting and Forecasting Survey 2016/17

Demographics

955 Respondents 23 Industries 80% Senior Finance

Are CFOs in denial?

CFOs think they are doing a better job now than 3 years ago, with two thirds saying the organization has more confidence in the planning process, yet………

More than 50% struggle to forecast beyond 6 months

More than 60% still can’t forecast revenue within +/- 5%

Almost 50% take more than 1 week to reforecast earnings

Non-Financial Data - the Forecasting Game Changer

Findings Part I.

78 percent of the CEOs

surveyed say that financial

indicators alone do not

adequately capture their

company's strengths and

weaknesses.

87 percent of CEOs and senior

executives describe their ability

to track financial performance as

“excellent or good”, just 29

percent of them describe their

non-financial record as excellent

or good.

80 percent of the CEOs

surveyed said that the board

and management should share

responsibility in terms of

monitoring the financial

results of the company, when it

comes to non-financial

indicators, they said that the

monitoring should be done by senior managers

Harnessing non-financial data makes for more

accurate forecasts

More than half are able to forecast earnings

between +/- 0-5% versus just 29% where their

organizations reported they were not making

more use of non-financial data.

Harnessing non-financial data makes organizations more

responsive

CAN REFORECAST MORE QUICKLY

2.5 times more likely to reforecast within 24hrs

RESPOND MORE QUICKLY TO MARKET CHANGE

2.5 times more likely to be able to respond more quickly

to market change

Harnessing non-financial data allows organizations to

see beyond 12 month horizon

They were more than twice as likely to be able to

forecast beyond the 12 month horizon,

CFOs top 5 priorities

1. Greater simulation and scenario planning

2. Engage with more non-finance stakeholders in the PBF process

3. Shift to rolling forecasts

4. More sophisticated analytical techniques e.g. data science

5. Non-financial data capture

…………..but only 11%of finance professionals strongly agree that they are making more use of non-financial data than they were 3 years ago

CFOs and Heads of FP&A at Loggerheads

Findings Part II.

FP&A IS LOOKING FOR ITS OWN IDENTITY

44% 18%

Heads of FP&A strongly believe that FP&A will become a separate discipline

from the accounting function

vs

HEADS OF FP&A

STRONGLY AGREE

CFOs STRONGLY

AGREE

29% 11%

Heads of FP&A more convinced that FP&A

will become a separately recognized function with its own

accounting body

vs

HEADS OF FP&A

STRONGLY AGREE

CFOs STRONGLY

AGREE

33% 25%

FP&A heads place even more emphasis

on the need for greater simulation

and scenario planning

vs

HEADS OF FP&A RANK SCENARIO

PLANNING AS NO.1 PRIORITY

CFOs RANK SCENARIO

PLANNING AS NO.1 PRIORITY

Cloud Uptake is Rising but Outdated Processes Remain Unchallenged

Findings Part III.

CLOUD UTOPIA

1 Business Model

1 Software Vendor

AllStakehold

ers Connected

AllPBF in the

cloud

CLOUD REALITY

Only 50%

use one

business model

Under 50%

use one

software vendor

Only 11% have

fully deployed

Cloud solutions

across the entire

business

Only 55%

reported an

increase in the

number of

stakeholders

able to update

plans

themselves

THE CLOUD JOURNEY

WHERE WE ARE CLOUD UTOPIA

Connectivity Collabora

tion

Data

Standardization

Accuracy

Automation

Forecasti

ng

accuracy1/3rd more likely to be able to forecast earning within +/- 0-5%

Time to

reforecast

1.5 times more likely to be able to reforecast within 24 hours

Benefits of CloudThose that have fully deployed Cloud across all business units are:

More

stakehold

ersMore than twice as likely to have strongly agreed to having more stakeholder involved in the BPF process over the last 3 years

More

Integrated

1/3rd more likely to have plans that are more integrated between different business functions

Technology

benefits

50% more likely to have reported an improved ability to connect more easily to new sources of data and 1/5th more likely to be able to produce larger more detailed plans

1/3rd less likely to view automation as an obstacle to process improvement and 1/5th less likely to view standardization as an obstacle to process improvement

Automatio

n &

Standardiz

ation

CFOs Who Ignore Continuous Planning May be Putting Their

Business at Risk

Findings Part IV.

Continuous planning makes for more

accurate forecasts

Continuous planning encourages more stakeholders and crucially better

visibilityThose that have adopted continuous planning are:-

FORECAST MORE ACCURATELY

1 23

times more likely to

be able to forecast earnings between +/- 0-5% versus those that have yet to adopt continuous planning.

Continuous planning makes organizations

more responsive

CAN REFORECAST MORE QUICKLY

1.5 times more likely to reforecast within 1 week.

RESPOND MORE QUICKLY TO MARKET CHANGE

4 times more likely to be able to respond more quickly to market change.

Those that have adopted continuous planning are:-

MORE STAKEHOLDER ENGAGEMENT

Almost twice as likely to report having engaged more users in the BPF process over the last 3 years.

Those that have adopted continuous planning are:-

IMPROVED STAKEHOLDER VISIBILITY

Almost twice as likely to have responded in agreement to all users have visibility of their plans and changes in real-time.

What is the Effect of Bigger Models and More Stakeholders

Findings Part V.

Engaging with more stakeholders…..

Does not guarantee more accuracy

2.5 times - process is perceived more positively

2 times - react more quickly to market change.

BUT

30% more likely to trust the operational data

63% of respondents say they now engage with more stakeholder in the PBF process, but almost 25% of business fail to involve stakeholders outside of the finance function

We are building bigger models

What is the effect of bigger business

models?

40% more organizations being able to forecast revenue within +/- 0-5%

2.5 times more likely to be able to react more quickly to market change

25% claim to be able to forecast beyond 12 months

60% of CFOs say they can build much bigger plans to enable them to plan in more detail

60% of CFOs say their PBF process can handle more complexity

But………………

Not more accurate

63% of respondents say they now engage with more stakeholder in the PBF process, but almost 25% of business fail to involve stakeholders outside of the finance function

More stakeholders

• Builds trust

• Can react to change

Bigger Models

• Lets you see out further

• More accurate revenue forecasts


Planning Analytics – Next steps?

▪ Planning Analytics WORKSHOPS

– Opportunity to see Planning Analytics in detail and to and undertake hands-on

exercises to explore scenarios for planning, analysis and score-carding.

– Wednesday, 1 March: End-User Workshop (half day)

– Wednesday 15 March: Modelling Workshop (full day)

– at IBM South Bank in London: http://www-05.ibm.com/uk/fpm-workshop/index.html

Please tick the box on today’s feedback form

▪ IBM Planning Analytics: free trial

– More details here: http://ibm.co/1VND8RY

http://www-05.ibm.com/uk/fpm-workshop/index.html

http://ibm.co/1VND8RY


Thank you for joining us today

Documents

Best Practices in Budgeting & Rolling Forecasts · Best Practices in Rolling Forecasting and Budgeting seminar ... Financial Performance Management Consultant ... SAP HR DW The Challenge