Driver Based Planning and Budgeting:
This white paper seeks to help readers understand how to begin the transition to driver-based budgeting and planning. Many find that this is their first step toward implementing true rolling forecasts (as opposed to quarterly or monthly forecasts "to the wall" or period end).
Many organizations are taking this step as an evolutionary approach to implementing continuous driver based planning and adaptive controls. They are being aided by the research and support materials provided by the Beyond Budgeting Round Table. Our goal is to help you understand how you can truly transform your planning and control activities into the proactive management function that adds greater value through faster decision making.
Making the Case for Change Through Driver Based Planning and Budgeting:
If you are the CFO, or you are somewhere in the CFO's chain of command, you realize the role finance plays in driver based planning and controlling organizational activities. Finance also drives the planning and budget and plan operations. There are numerous problems with this traditional budgeting process which include (1) it is costly to perform, (2) it is time consuming, (3) it can detract from value, (4) it slows response times and limits innovation, (5) it leads to gaming and a lack of transparency, and (6) it sub-optimizes organizational results by limiting reach.
Even with faster computing power, many find that annual budgets cannot keep up with the rapid change of business today. Recent surveys show that the majority of companies still use spreadsheets to budget and plan operations. These off-line spreadsheets introduce a host of problems because they allow operational managers to create their own assumptions which often do not adhere to corporate guidance.
This results in implementing rolling forecasts attempts to coordinate parts that are operating in different spheres. In addition, driver-based budgeting and planning departmental tactics are not aligned with each other or with corporate strategies so the focus shifts to the numbers and negotiating one that is right for you rather than on understanding the interrelationships. This often results in a very disconnected system.
These problems recur on an interim basis during attempts for mid-year forecasts. Disconnected systems result in lengthy forecasts (usually three to four weeks). Managers often focus on the line item detail rather than the total picture. Due to the lack of consistency, you are unable to learn what factors are contributing to your success
or failure. In many cases, the entire process becomes an exercise in revalidating the commitment made during the annual process.
Even though the faults information technology planning and budgeting are well documented, you often find finance professionals clinging to their traditional approaches as much as someone who falls overboard clings to the ring of a life buoy. It may not meet all of their needs for being safe and dry but at least it provides hope. In these situations, the only way to change people is to help them see that there is a better way. The Beyond Budgeting principles provide that better way. This paper will show you how.
My first experience in understanding budgeting and planning came from a comprehensive case example which required preparing the flow of planning worksheets for both annual and monthly plans. I distinctly remember the struggles in understanding the flow of numbers from the sales plan through the production plan and dealing with equivalent units of production. This was in the late 70's so changing numbers was still a pencil and paper exercise.
While computers have largely automated these tasks, the conceptual flow is still the
same. If you want to make the change, you (or your boss) will likely ask,
"What's different about driver-based planning and budgeting?"
"Why is it step one to implementing a rolling forecast?"
"Why is continuous forecasting and adaptive control necessary to be successful in today's
world?"
These are all good questions that this paper will help to answer.
Driver Based Planning And Budgetingcan be an exhilarating activity. It benefits from creative minds that can explore new possibilities, but it also requires rigorous analysis. Financial discipline is needed to make sure plans are realistic. Otherwise, plans are merely wishful thinking. The planning process of creating a budget is one of finance's key activities that reconcile aspirations to the numbers it takes to reach them. As Horngren points out ? it creates the financial blueprint.
