Integrated Business Planning 2.0
What is the added value for the Company?
What strikes me most is the budget struggle so many companies experience in a decreasing market. The Corona crisis has led more and more to drive for lower costs as income has remained stagnant. Budgets needs to be reduced, but all budget owners do not see the room to reduce their budgets. Their department is ‘here to stay’, at least they think that. But are they really ‘here to stay’?
All departments should contribute to the Company’s goals and objectives and show ‘what’ they are doing is adding real value. Either you make money, you support making money, avoid losing money or you avoid spending too much money. But you definitely should add value to the organization.
How many times have questions been raised during the budget round on whether expenditure is really creating added value. ‘Is this cost really necessary’? ‘How can we justify this budget? This expenditure was not there last year!’ ‘Why isn’t your budget decreasing, we all have to chip in!’
Lengthy discussions always take place that require explanation and conviction to gain the approval of stakeholders and can be the discussions you would like to avoid. This is time consuming and gets us away from real priority of getting the right budget in place to steer the Company.
Managers are always defending their team and business. They all think that they are adding the right value to the organization and believe there position in the company is essential. The reality we see is a little different. Budget rounds often start with last year’s spend and changes to that spend needs to be explained. We often see situations where Managers increase their budgets year on year despite the message from The Board’ to trim down rather than up, perhaps due to challenging trading conditions or a drop in income. This is particularly relevant in today’s uncertain climate.
I believe there is a much better way to approach the business planning process. You can avoid those lengthy discussions and make budgets transparent, translated to the role of that department within the company. Rather than simply basing your budget on what you did last year, start from scratch and tell the story on why your department should be there and convince management of this position: ‘you are here to stay’. This creates a bottom up budget which explains what, why and when you are going to spend or make money.
A good start position is to use trend data such as previous 3-month spend instead of the full year. Plan in detail, for example by workforce per employee, or CAPEX per asset, commitments per contract, project portfolio per project or your production plan per stock keeping unit. But most of all make the connection between spend and the value added to the bottom line.
A lot of companies avoid this zero-based budgeting process, because it is time consuming and they do not have the right tools to organize this effectively and efficiently. This is despite the fact they know management can really benefit from this process to support decision making. It all creates a real dilemma for finance professionals!
OneStream XF can help finance professionals to focus on streamlining this process, saving time and avoiding those lengthy and unnecessary discussions. With the right capabilities in your financial planning software you can quickly convince your Board that your recommendations are the right way to go by creating transparency, and by slicing and dicing to the right level of detail to tell your story. This efficient process can help justify budgets to achieve the company goals.
If you are able to demonstrate your contribution and value, management is able to prioritize activities within the company to reach Company’s goals. This is essential in the current climate and in times of crisis, when management has to make tough decisions - and fully understand the consequence of those decisions.
Our customers have streamlined this processs in areas such as Workforce planning where budgets per employee are designed from the bottom-up.
Other customers are (also) using CAPEX Planning to understand their investments and the duration and time to replace those assets. They can understand commitments, for example what did we commit to spend and when are we spending this? Additionally, customers are planning large capital projects using all of the above.
This all ends up off course in an overall detailed cash flow plan which helps management to make the right decisions when tackling low-income periods.
The feedback from our Customers is that using driver-based planning in different scenario’s is the most effective way to go. This way the main profit and cost drivers are key to the forward plan. By being open and transparent, the impact of changes to those drivers are immediately visible. Adding profitability and cost analysis to this shows the added value of your businesses.
Combining everything above will bring you to implement Driver based Planning 2.0, which enables you to also plan on your added value drivers. How much money are you making, how much support do you deliver to make money, how much money do you avoid losing or avoid spending in your company?
About the author: Martijn van Bommel
Martijn is a Certified Public Accountant (RA in Dutch) and has over 20 years of Finance experience. He started his career at the Audit Firm EY.
In his role as Director Sales and Business Development he translates financial struggle in the Office of Finance to the right EPM solutions, helping our customers in transforming and improving their finance function.