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The Future of Forecasting and Budgeting
The document outlines the evolution of forecasting and budgeting practices in corporate finance, emphasizing the shift towards integrated planning and the use of advanced technologies such as AI and machine learning. It highlights the need for organizations to adapt to modern challenges driven by globalization, technological changes, and the rise of new competitors. Additionally, it discusses the limitations of traditional methods like spreadsheets and advocates for more efficient, real-time data processing solutions.
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The Future of Forecasting and Budgeting
- 1. The Future of Forecastingand BudgetingJames Myers, Founder and CEO, FP&A Strategy Consulting
- 2.
- 3. History of Planning CorporateInvestment Model Discounted cash flow model to stack rank R&D/Capex investments Fra Luca Bartolomeo de Pacioli, "The Father of Accounting and Bookkeeping“ was born. He was the first person to publish a work on the double-entry system of book- keeping on the continent. 1447 1921 Corporate Investment Model Discounted cash flow model to stack rank R&D/Capex investments GM almost runs out of money because they overbought inventory before the slump in ’20-’21. Alfred Sloan developed a new management principle that could prevent this from happening 1972 Corporate Investment Model Discounted cash flow model to stack rank R&D/Capex investments SAP was started in 1972 by five former IBM employees with a vision of creating a standard application software for real-time business processing. Corporate Investment Model Discounted cash flow model to stack rank R&D/Capex investments Microsoft released the first version of Excel for the Macintosh on September 30, 1985, and the first Windows version in November 1987. Corporate Investment Model Discounted cash flow model to stack rank R&D/Capex investments Software as a service (SaaS) model for corporate performance management begins to take shape 1985 2003 + Corporate Investment Model Discounted cash flow model to stack rank R&D/Capex investments Machine Learning; Artificial intelligence, predictive and prescriptive Analytics; Robotics; Blockchain etc.
- 4. Why do weneed planning in the modern era Uncertainty: 1. Globalization and the rise of new global competitors 2. “Software eating the world” 3. Increased speed of technology change and consumer preference 4. The large number of high growth startups entering every industry The Startup Way – Eric Ries
- 5. Planning Vision: FP&AValue Cycle © FP&A Strategy Consulting LLC DATA FP&A STRATEGYBUSINESS Business Partnering Creating Insight Value Creation
- 6. Align to YourStrategy 1. Diagnosis What is the challenge 2. Guiding Policy Overall approach to overcoming or coping with the obstacle in the diagnosis 3. Coherent Actions Designed to carry out the guiding principle
- 7. The Reality “Our research revealsthat, on average, 95% of a company’s employees are unaware of, or do not understand, its strategy.” https://hbr.org/2005/10/the-office-of- strategy-management
- 8. The reality… FP&AEmpowerment Survey 2017 FP&A Empowerment Survey: 311 respondents (Due for release Nov’17) – Survey opening soon Time on the Budget Process Time on the Forecast Process
- 9. The reality… FP&AEmpowerment Survey 2017 Forecast Frequency Not Applicable Forecast Accuracy FP&A Empowerment Survey: 311 respondents (Due for release Nov’17) – Survey opening soon
- 10. Traditional Planning &Budgeting Bottom up Planning & Budgeting Top down Planning & Budgeting 16% of companies* * FP&A Empowerment Survey (Due for release Nov’17) 14% of companies* 68% of companies* 2% of companies do nether* Business Groups Business Units Business Segments
- 11. Rolling Forecast Decoupling Planningfrom Budgeting Q1 * FP&A Empowerment Survey (Due for release Nov’17) Q2 Q3 Q4 Q1 Budget Forecast M1 Forecast M2 Forecast M3 58% of companies have rolling forecasts * 59% of companies feel they need to improve forecast accuracy*
- 12. Driver Based forecasting Rollingup the driver not the result * FP&A Empowerment Survey (Due for release Nov’17) Drivers 1 e.g. HC Drivers 2 e.g. Average Salary Drivers 3 e.g. Foreign Exchange X X = Forecast
- 13. Salaries Cost –Driver model GL data HR data (masked) Dimensions: • Period • Function • Region Dimensions: • Period • Function • Region Uplift Cube Dimensions: • Period • Function • Region c HR data (masked) Output: • Uplift factor Salaries Cube Dimensions: • Emp ID (masked) • Period Salaries Ref data Average Salary Dimensions: • Period • Function • Region cPeriods Output: • Average salary cTBH/Exits Output
- 14. Integrated Planning Traditional planning *FP&A Empowerment Survey (Due for release Nov’17) Sales Supply chain OPEX Integrated planning Sales OPEX Supply chain Data from one forecast process feeds another
- 15. Business Planning Transformation Currentchallenges Business Planning currently performed off-line and the processes differs by Geo and Business Group Cross BU, Cross Geo data analysis is currently not possible until it is consolidated in the corporate tool Difficult to perform any business analysis on internal and external drivers Future State Business Planning performed in a single solution, managed by a Center of Excellence to ensure consistency across Geo’s and BU’s Business planning results are loaded into the data lake on a near real time basis to enable visibility across BU’s and Geo’s Solution to capture current underlying assumptions, to enable more detail understanding of how the numbers were derived Benefits Standardized process ensure efficiencies of scale and less repetitive work reducing time spent on forecasting Improved decision making across Geo’s and BU’s as all the data is available in on place Analysis can be done on underlying assumptions, driving more analytical forecasting and improving forecast accuracy
- 16. Excel – Thegood, the bad and the ugly https://www.forbes.com/sites/metabrown/2017/12/31/3-reasons-why-replacing-microsoft-excel-is-worth-money-to-a-boss/#2b61466737a9 Reasons to switch (Forbes): • Hands-on involvement sucks up expensive labor • Spreadsheet error leaves business open to risk and liability • When spreadsheet creators leave, knowledge leaves with them My reason’s to switch (Planning Focus): • Valuable information is stored off line • Data capture by multiple people & consolidation is prone to error • Versioning is very difficult to manage • Data is not secure
- 17. Excel – Whyit’s here to stay 1. The ease and speed you can create a model 2. The barriers to entry are low – no IT involvement, no PO required 3. Accessible training online 4. Excel has advanced: • PowerQuery – connects, shape and/or cleanses data • Power Pivot – data modelling • Power BI – data vizualization
- 18. Building the perfectExcel model Data Source e.g. ERP Power Query Power Pivot Excel Pivot Table Pivot data Build cubes Filter data Error checks Formulas Link tables Lookup’s Sum GetPivotData
- 19. Options Technology Pro’s Con’s Excelbased solutions • Easy to build and maintain • Low Cost solution • Data collection prone to error and requires it to be consolidated • Requires multiple emails and co-ordination to collect all submissions • Security could be a challenge Database with web interface solutions • Data loads inputs directly into SQL • Interface is online reducing emails • Integrated reporting - real time feedback • Highly customizable • IT Support required for setup • Risk of loosing data if there are no proper backups • Interface may be difficult to change easily Cloud purpose built planning solutions • Interface is online reducing emails and tighter control over access • Low IT requirements and easy setup • Low cost • All online, so instant feedback on results • Limited ability to customization – typically your processes need to fit into their solution • Limited scenario modeling capability Cloud planning/ modelling solutions • Interface is online reducing emails and tighter control over access • Low IT Support Required • Strong Modelling capabilities • Strong audit capabilities • Model maintenance requires expertise • Data size limitations • SaaS application so data controlled by someone else ERP solutions • Data is captured in batch, but updates speeds are within seconds • Enterprise ready – Audit etc. • Most Expensive • Highly dependent on IT support and set up • Deployment times slow • Limited or costly customization • Limited scenario modeling capability
- 20. Rise of theMachine – AI and the impact of Finance
- 21. Technology accessibility matrix Available Accessible Excel ERP Key: Availability= is ease to get Accessibility = is ease to use
- 22. The Jobs Landscapein 2022
- 23. Moravec Paradox Moravec Paradoxstates that while "it is comparatively easy to make computers exhibit adult level performance on intelligence tests or playing checkers, and difficult or impossible to give them the skills of a one-year-old when it comes to perception and mobility".
- 24. The real advantageof using ML Advantages: 1. Reduced natural bias 2. Identify things we never thought of – the unknown unknowns 3. Analyze large amounts of data and learn Barriers: 1. Volume of Finance data available 2. Data can be messy 3. ML is not readily accessible or available
- 25. Readily available typesof machine learning Sentiment Analysis Scale 0-1 (0 being 100% negative and 1 being 100% positive) Key word Identifies the key words in a set of text Boolean prediction Predicts if an event will happen or not e.g. a pipeline deal won or lost Forecasting Linear time based forecast AutoML is a suite of machine learning products that enables users with limited machine learning expertise to train high-quality models specific to their business needs
- 26. Interpredictive Planning –The future of financial planning Sales OPEX Supply chain Human Machine Accountability Interpredictive planning focuses time and accountability driver inputs. These drivers form the inputs into the forecasting model. Once entered, the model in then optimized according to specific requirements e.g. Revenue growth; EBITDA The advantages are: 1. More responsive change to the P&L driven by changes in drives e.g. demand 2. Faster planning cycles, driving better decision making 3. Improved forecast quality as the solution learns over time and improves Reducetime Machine ExternalfactorsOptimization, refers to the study of decision problems in which one seeks to minimize (min) or maximize (max) a function by systematically choosing the values of variables within their allowed sets. Optimization
- 27. Thank You For blogs– link in at: www.linkedin.com/in/jamesmyersw 3 Key Predictions for 2019 for FP&A How can finance leaders really embrace their role as a strategic advisor, connecting business to strategy and data? Artificial Intelligence and the Future of Finance
- 28. Bibliography 1. FP&A EmpowermentSurvey: http://bit.ly/FPAEmpower 2. The Startup Way – Eric Ries 3. To be a Machine – Mark O’Connell 4. https://www.forbes.com/sites/metabrown/2017/12/31/3-reasons-why-replacing-microsoft-excel-is- worth-money-to-a-boss/#2b61466737a9 5. Wikipedia
Editor's Notes
- #4 In Alfred Sloan’s My years with General Motors (1963), he describes how GE almost ran out of cash Co-ordinated control of decentralized operation – rigorous production estimates for each division manager of the precise number of car the GM should sell in an ideal year. Using these estimated in combination with internal targets and external macro economic factors, the company would product a forecast of how many car each division was responsible for selling
- #7 Step 1: Align to the business Strategy Step 2: Break these down into strategic Priorities Step 3: Define the Key Objectives for each of the priorities Step 4: Define what the measures of success Step 5: Identify the key drivers of the measures Step 6: Create actionable metrics around the key drivers
- #11 Issues with traditional planning Strategy is not integrated Multiple level – each with non standardized process Difficult to get ownership of the numbers if there is no bottoms up Too much time rolling up the numbers and not enough time on the analytics
- #15 Issues with traditional planning Strategy is not integrated Multiple level – each with non standardized process Difficult to get ownership of the numbers if there is no bottoms up Too much time rolling up the numbers and not enough time on the analytics
- #17 Hands-on involvement sucks up expensive labor Building and maintain spreadsheets cost time and money Spreadsheet error leaves business open to risk and liability Most conservative research-based estimate indicates that at least 1 in every 100 spreadsheet cells contains an error $6 billion dollar loss attributed to the London Whale was partly due to a spreadsheet error When spreadsheet creators leave, knowledge leaves with them Spreadsheets are created informally, and they lack elements that make professionally-developed software desirable, such as: Designers with a solid understanding of user needs Design review, to prevent problems before the software is built Programmers who are well-trained and use appropriate processes to work efficiently and minimize flaws in the end product Quality assurance, to ensure the program does what it’s supposed to do User testing to detect and correct problems in the product before it gets into general circulation Documentation, both internal documents used by developers and documents such as manuals and training guides for end users.