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The Eight Essentials of Planning and Budgeting

SpearMC Consulting

Wednesday, April 10th 2013

Session 100480

Rich Yates • SpearMC Consulting

Marcus Bode • SpearMC Consulting

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About SpearMC

SpearMC is a full-service consulting and technology

services firm focusing on PeopleSoft Financials

Our consultants and network of PeopleSoft Analysts, Technical Leads and Project Managers average fifteen

years of PeopleSoft experience

We are North America’s leading provider of custom-tailored PeopleSoft Financial training solutions and

educational content development.

It is our mission to provide the highest levels of professional service at competitive rates

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In 2012, SpearMC was recognized by Inc.

Magazine as one of the Inc. 500|5000 Fastest-Growing

Private Companies in America and by the San

Francisco Business Times one of the 100 Fastest-

Growing Companies in the Bay Area

Slide 5

About SpearMC

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Personal Service

Professional Results

ERP Integration

PeopleSoft Training

Project Management

Operations Improvement

Business Intelligence

IT Strategy & Architecture

Application Development

Recruiting & Staffing

About SpearMC – Our Expertise

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Marcus Bode – Principal

mbode@spearmc.com

866-SPEARMC x801

Marcus Bode, CPA – SpearMC Principal

Co-founded SpearMC Consulting in 2002

PeopleSoft Financials, Cash Management and Procure-to-Pay Expert

Certified PeopleSoft v9.1 Financials

20+ Years Experience…majority PeopleSoft

About Your Presenters

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Rich Yates– Sr. Consultant

rich.yates@spearmc.com

866-SPEARMC x801

Rich Yates – SpearMC Sr. Consultant

Working with SpearMC Consulting since 2010

Budgeting Planning and Forecasting Expert

PeopleSoft General Ledger & nVision Expert

Hyperion Planning Expert

About Your Presenters

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…the life expectancy of companies have been shrinking steadily. In 1938 the life expectancy of an S&P

Fortune 500 company was about 75 years. In 2010 it had shrunk to about 15 years. -- Richard Foster

CHANGE – THE ONE CONSTANT

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Your budget

tool

needs to

handle a

changing,

accelerating

business

environment.

CHANGE – THE ONE CONSTANT

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“A budget is a systematic method of allocating financial,

physical, and human resources to achieve strategic goals.

Companies develop budgets in order to monitor progress toward

their goals, help control spending, and predict cash flow and

profit.”

From: “Best practices: Developing Budgets”

http://www.inc.com/articles/2000/01/16379.html

WHAT IS A BUDGET?

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WHAT IS A BUDGET?

Tools

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WHAT IS A BUDGET?

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Budgeting focuses on controlling spending to ensure the

company has enough income and cash to operate.

It’s about not failing.

Planning focuses on “things” (headcount, units produced, sales

calls, etc).

While budgeting is about money, the purpose of planning is to

figure out how a company can best implement its strategy and

achieve its objectives. It’s about succeeding. -- From Robert Kugel, Ventana Research

THE BUDGET AND THE PLAN

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1. Link the budget to corporate strategy

2. Start with the end in mind

3. Focus on business drivers

4. The devil is in the details

5. Crawl, walk, then run

6. Seek help

7. Leverage the “what if?”

8. Consider rolling forecasts

WHAT ARE THE EIGHT ESSENTIALS?

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#1 LINK THE BUDGET TO STRATEGY

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Successful companies use their budgets as strategic tools

Strategy is the “HOW” of “try and take over the world…”

For example:

• Increase market penetration in Denver by 20%

• Win three big government contracts

• Reduce system downtime by 15%

#1 LINK THE BUDGET TO STRATEGY

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• Goals are set at a high level

• Planners convert the strategic goal in to financial numbers

• Benefits of tying the budget to strategic goals: • Gives a clearer basis for making budgeting decisions.

• Brings the entire organization in to sync

#1 LINK THE BUDGET TO STRATEGY

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#1 LINK THE BUDGET TO STRATEGY

Communicate

Communicate

Communicate

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Prepare yourself to face these questions:

• What generated this number?

• Why did this number change?

#2 START WITH THE END IN MIND

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• Capture the information you will need to make decisions • Operational data

• Financial data

• Usually finance reports are a good place to start

• Pull the covers back to see the details

• Build a structure that will support pulling that data

• Remember management reports

#2 START WITH THE END IN MIND

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1. Rocks, Pebbles, Sand

#3 DRIVERS

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Cost or Revenue Driver:

• Consider the 80/20 rule or the Pareto principle – drivers are those 20% of the total

that drive 80% of the results

• Driver based planning includes operational data as well as financial data

• Drivers are particular to your business and strategy

#3 DRIVERS

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• Financial Drivers:

Price, Volume, Margin, COGS, AR Days, AP Days, Inventory Days

• Non-financial Drivers

Call Volume, Employee Turnover, % Orders fulfilled, Customer

Satisfaction, Returns

#3 DRIVERS Examples:

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Understanding what drives your business:

• Tells you what matters

• Helps you know the variables for your budget and forecasts

• Focus on results

Some companies use Activity Based Costing (ABC) to improve budget

data by identifying drivers

#3 DRIVERS

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Once drivers are identified – budget for items that have similar drivers

as a group.

For example:

• Headcount drives office supplies, travel expense, salaries, and

many other

#3 DRIVERS

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“Accurate cost information is fundamental to budgeting. Companies that

use accurate cost management techniques and provide budget

developers with ready access to cost information improve both the

accuracy and the speed of their budget process.” From: “Best practices: Developing Budgets”

http://www.inc.com/articles/2000/01/16379.html

#4 THE DEVIL IS IN THE DETAILS

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• It’s important to have the RIGHT information in the RIGHT

amount IN the system in order to be able to answer the

important questions QUICKLY

#4 THE DEVIL IS IN THE DETAILS

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• Expect multiple inputs • Finance data

• HR data

• Operational data

• Other information not stored in the ERP

• Extract, Transform, Load • Loads the information according to rules

• Transforming is good

#4 THE DEVIL IS IN THE DETAILS Right-sizing the data is part art and science

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• Too much information • Increases complexity

• Creates long processing and calculation times

• Delays the ability to make decisions

#4 THE DEVIL IS IN THE DETAILS

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• Too little information • Diminishes accuracy

• Delays analysis

• Fuzzy understanding

#4 THE DEVIL IS IN THE DETAILS

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“The only guarantee with respect to budgeting is that the more detailed

the budget is, the more wrong it will be.”

#4 THE DEVIL IS IN THE DETAILS

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What are the details?

• Amounts of information, that when taken in comparison to the size

of the organization, are useful for making decisions

• Use the 80/20 rule to decide what amounts of information are

significant and worth budgeting

• For example: Budget for the top 20% of customers individually, then

the next 80% as a group or groups.

#4 THE DEVIL IS IN THE DETAILS The Principle

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Stream line input

• Consistent use of forms

• Enter directly in to budgeting tool

#4 THE DEVIL IS IN THE DETAILS The Practice

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Before:

• Different business units have their own system

• Manually enter in to Excel using different spreadsheets

• Planner consolidates and enters in to her own spreadsheet

• Summary workbook uses links to spreadsheet

Disadvantages:

• Difficult to control timing and change of information

• Multiple layers make it difficult to answer questions about

detail quickly.

#4 THE DEVIL IS IN THE DETAILS The Practice

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After:

• Same input form for each department

• Entered directly into budget tool

• Budget tool controls version

Benefits:

• Control

• Simplicity

#4 THE DEVIL IS IN THE DETAILS The Practice

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What budgeting tool do most companies use today?

#5 CRAWL, WALK, RUN The Principle

67% Excel

Source: Institute of Management Accountants SBA (1) – spreadsheet budget applications

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Consider the roll out of functionality in phases.

• What you learn in phase 1, will improve phase 2.

• What you learn in phase 2, will improve phase 3, etc.

• What is worth automating is worth doing manually first.

• A phased approach puts functionality in the hands of users • Faster

• Less errors, because there is less to go wrong

• Test, test, test

#5 CRAWL, WALK, RUN The Principle

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The correct way:

• Builds user confidence

• Ensures system integrity

• Keeps hope alive

#5 CRAWL, WALK, RUN The Power

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S Sometimes you don’t see the forest for the trees.

#6 SEEK HELP

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1. Using a flamethrower when you needed a match 1. Getting a budgeting system that is far more than what you need.

2. Expensive to buy, expensive to maintain

3. Never implement it fully.

#6 SEEK HELP

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2. Building a Cadillac when you needed a bicycle 1. Introducing too much complexity

2. Long implementation

3. Higher risk

#6 SEEK HELP

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3. A plan that incorporates: • Change management

• Training

• Testing

• Contingency plans

#6 SEEK HELP

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4. If you implement alone, ultimately if it fails you have no one

else to blame!

#6 SEEK HELP

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“Everyone has a plan ‘till they get punched in the mouth.”

-- Mike Tyson

#7 LEVERAGE THE “WHAT IF”

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• Plan for potential “what if” scenarios

• For example: Worst, Average, Best case scenarios

• This makes management better prepared for sudden market

changes.

• Decisions made early to cut or increase spending as a

response to changing market conditions allow the company to

gain a competitive advantage

#7 LEVERAGE THE “WHAT IF”

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• “The goal of forecasting is NOT to predict the future but to tell

you what you need to know to take meaningful action in the

present.”

--Paul Saffo, Director, Institute for the Future, Stanford University

#8 ROLLING FORECASTS

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• Actual data for the year

plus

• Budget/Forecast for the remainder of the year

#8 ROLLING FORECASTS What is a forecast?

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• Extends for 12 months (overlaps years)

• At the end of each accounting period • The same period is forecasted for the next year

• The remaining periods are updated to account for new information

• Continual budgeting cycle

#8 ROLLING FORECASTS What is a rolling forecast?

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From: “Managing with Rolling Forecasts” by John Stretch

#8 ROLLING FORECASTS Some differences between a traditional budget and a

rolling forecast

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• Forecast horizon fits your business cycle – 12, 15, 18 months

• Many companies forecast quarterly

• Forecast at a lower level of detail for transactions that are

further out in the future.

• Increase detail as time draws near.

• Put more effort in to the near term horizon (the next 90 days)

• Focus on drivers

• Review monthly

#8 ROLLING FORECASTS How is a forecast used?

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• Targets based on current not outdated information • Fewer “excuse variances”

• Strategy becomes a continual discussion

• Adaptability

• Facilitates the creation of the annual budget

• Improves ability to forecast to shareholders

• Reduces game playing with numbers

#8 ROLLING FORECASTS What are the benefits of a forecast?

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• Reduces game playing with numbers

“Budgeting is the bane of corporate America.

It should never have existed.

Making a budget

is an exercise in minimization.

You’re always getting

the lowest out of people,

because everyone is negotiating

to get the lowest number.”

--Jack Welch, former CEO, General Electric

#8 ROLLING FORECASTS

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1. Link the budget to corporate strategy

2. Start with the end in mind

3. Focus on business drivers

4. The devil is in the details

5. Crawl, walk, then run

6. Seek help

7. Leverage the “what if?”

8. Consider rolling forecasts

WHAT ARE THE EIGHT ESSENTIALS?

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Questions?

Comments?

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Next SpearMC Session at COLLABORATE13

• How to make PeopleSoft Multi-Currency Work for You

Session ID: 100460

Date: Wed, April 10th

Time: 4:15 p.m. – 5:15 p.m.

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December 2-4, 2013 Denver, Colorado

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