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Decision making under complex Internal & External
Environment
BargainingPowerof
Suppliers
Threat of Substitute
Products / Services
Bargainingpowerof
Buyers
Threat of new
Entrants
Rivalry among
Existing
Competitors
Legal
Political
Econo
mical
Social
Environ
mental
Technologi
cal
Changing
Demographics,
Tastes &
Preferences
Internet
communities
Fast pace of
Technological
change making it
challenging to
compete
-Japan Tsunami
- Volcanic Ash
- Thailand Floods
- Europeon debt crisis
- China, India, Brazil
economic Slow down
- Fear of Global
recession- Middles East
Crisis
-- Increased govt.
regulations
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Discussion Framework
Strategic Decisions
Organization Growth
Resource Allocation
- New Product Development
- Capacity Expansion
- Divestment
Text
Manage Risk
Ceasing Opportunity
Process /
Organization alignment
Tools & Technology
Infrastructure
Knowledge /
Performance Mgt.
Effective Financial Forecasting
Agile Efficient Accurate Aligned
Leadership
Accountability
Environment
External
- Political & Economic
- Social & Technology
Internal (Porter 5 forces)
- New Competition & Rivalry
- Threat of substitutes
- Customers & Suppliers
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Discussion Framework
Strategic Decisions
Organization Growth
Resource Allocation
- New Product Development
- Capacity Expansion
- Divestment
Text
Manage Risk
Ceasing Opportunity
Process /
Organization alignment
Tools & Technology
Infrastructure
Knowledge /
Performance Mgt.
Effective Financial Forecasting
Agile Efficient Accurate Aligned
Leadership
Accountability
Environment
External
- Political & Economic
- Social & Technology
Internal (Porter 5 forces)
- New Competition & Rivalry
- Threat of substitutes
- Customers & Suppliers
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Enhancing Agility & Efficiency to incorporate change in
rapidly changing business environment
Increased need for agility has put a great pressure to be „Efficient‟ and be able
to Forecast & Reforecast
Frequency of Forecast & Re forecast .- What is the optimal Forecasting Frequency
Annual
Semi-
Annual
Quarterly
Monthly
(rolling)
On-
Demand
Desired FrequencyTypical Frequency“Not an Option”
- Risk of missing opportunity
- Not able to detect risk
Managing the expectations while trying to improve the frequency & efficiency:
Focus on the most important business drivers while trying to improve frequency to
monthly or on-demand e.g. Sales volume and Head count requirement
Organizational appetite to change the annual financial plan is very low, so maintaining the
Risks & Opportunity (R&O) schedule is ‘Critical’
Continuous streamlining of Forecasting processes absolute critical to improve frequency
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Accuracy – Key Performance Indicator (KPI) for Effective
Financial Forecasting
Accuracy dependent on choice/mix of Budget Methodologies used
• Budget based on historical data
• Not very effective, used with other methodologiesHistorical
• Assumes no history & presumption about future
• Establish benchmark as per industry norms &
performance expectations
Zero Based Budgeting
• Establishing metrics for expected changes in business
• Budget incorporates expected results from investment
in sales resources or adding new products & services
Performance Based
Budgeting
• Selecting important ‘drivers’ of business to establish
the budgets. E.g. new sales volume as driver to
determine operational resources & Real Estate
Driver Based Budgeting
No matter which methodology is used, Input Quality is absolutely Critical to ensure Quality Output
Garbage-In-Garbage-Out (GIGO)
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Accuracy – Bridging the Forecasting Gap
Managing
Against ‘Fixed
Budget’
Improving
overall health
and profitability
of business
Shift in Focus
With Shift in Focus, Companies are increasingly using combination of
various budgeting methodologies with increased usage of „Drivers‟ or
„Performance‟ expectations
To produce accurate forecasts using Driver based budgeting methodologies, requires an ability to
perform „What-If‟ scenario analysis to consider alternative strategies, using right performance
data and allocation of budgets.
Helps bridge „Forecasting Gap‟
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Alignment & Stakeholders Buy-In
Alignment of budgeting with Corporate Goals & Strategy
“Strategy Drives the „Budget‟ or Budget drives the „Strategy”
Alignment of Strategic Objectives of the company with Planning & Forecasting are
absolutely critical to support critical decision making in all aspects of business
Financial forecasting won’t be effective if budgeting and strategy are entirely independent
Stakeholders Buy-In
Effective financial forecasting is not possible unless all stake holders in the business be at Top,
Middle and Junior level are aligned to Corporate goals, strategies and Plans
Following approaches to planning & forecasting are used to engage various business
stakeholders but striking a balances between level of engagement and buy-in is challenging
- Top-Down Approach
- Bottom-Up
- Combination of Top-Down & Bottom-Up
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Approaches to Financial Planning & Forecasting
Top-Down
• Senior level defining
the goals & objective of
the company which
guides the planning
process
• Best way to ensure that
highest level goals are
reflected thruout the
budgets
• Risk in budget / plan
feasibility due to
potential lack of
organizational buy-in
Bottom-Up
• Each department
creates proposed
budget basis actual
performance data. Roll
up is performed to
determine company
wide budget
• Best way to ensure
organization wide buy-in
to budget targets
• May not support the
company’s objective
and financial targets
Combination of Top-
Down & Bottom-Up
• Takes best of both the
approaches &
increasingly used in
recent times
• Link performance of all
levels to company’s
strategic vision and
financial targets
• More difficult to manage
• Defined processes and
Automation critical to
successful deployment
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Effective
Financial
Forecasting
Organization
Process
Knowledge
Management
Technology
Performance
Management
Capabilities & Enablers
(Tracking actual performance vs budget)
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Process - Building ‘No Surprise’ Culture
Need to have defined and formal procedures & approaches for building and managing the
change in Financial planning and forecasting activities
Effective financial forecasting Processes
Key Ingredients
Incorporating
Business Drivers
Into Forecasting
Process
Ability to Reforecast
Rolling Forecast
Based on current
data
Scenario Modeling
What-If &
Change
Analysis
Defined Workflows
For Risk Identification&
Mitigation
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Organization – Focus & Collaboration
Top management Sponsorship with Organization wide collaboration &
ownership ensures delivery of forecasted results
Creation of Budget Committee / Corporate Planning (COE) team keep organization
focus on development of budgets & forecasts considering key factors
Top-Down / Bottom-up Collaboration
Results Accountability
Collaboration across departments
Risk / Compliance Awareness
Ensure organization wide ‘buy-in’
to plans / forecasts
Shared / Common vision drives
team work & minimize risk
Improved performance and ensures
delivery of targets
Risks & Compliance driven culture
ensures less organizational risks &
surprises
All Functions
Sales & Marketing
Operations
Procurement / HR
Technology
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Knowledge Management - Enabling informed decision making
based on factual data
Data
Repository
GL & Sub
ledger
Integration
Risk Data
Summary
reports
Dashboards
Drill Down 1
Industry
Segment
Drill Down 2
Product
Segment
Drill Down 3
Customer
Level
DecisionMarking&ForecastingBasedon
ObjectiveData
Faster
information
flow
Accurate
Forecasts
Avoid Risk /
Surprises
Enables
Frequent
Re-Forecasts
Performance
Management
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Technology
Requirements:
Automated work flows to guide all participants in planning & forecasting process
Automated tools facilitating real time data availability, drill-down and analysis
Automated triggers built in the process to adjust forecast in the event of significant
External and / or Internal Event
Enablers:
Financial reporting and consolidation applications
Planning / budgeting, forecasting & Analytical applications
Role of Excel Spreadsheets:- Can we eliminate spreadsheets??
Effort should be made to reduce reliance on ‘excel spreadsheets’ as tool to manage
forecasting processes. Evaluate CBA of investing in applications that can support
and store complicated / complex forecasting and actual performance data.
Excel spreadsheet role should be reduced to store ‘Exported’ data from main frame
applications rather than to use them as primary tool to manage multi-product, multi
national / global companies.
e.g. IBM Cognos TM1,
Oracle Hyperion
planning, etc.
