Efficiency-improvement for the Budgeting Process
In most organisations, the annual budgeting process is rarely without setbacks and complications, which can be caused by several diverse factors. In many instances, the culprit for these delays is the data that needs to be captured into the budget model by various divisions or cost centres within the organisation. For some divisions or cost centres, this submission of budgeting data might not be a high priority. As mentioned in one of my previous post, the budgeting process is highly iterative, sometimes the process requires dozens of recalculations and adjustments to assumptions before the desired results are achieved.
The typical budgeting process is represented in the graphic below, where we see that there is a sequential/iterative process that requires the completion of, for example, the sales plan before the production plan can be completed, which in turn must be finished before the departmental expense budgets can be finished, which then only yields a financing plan. If the results do not meet expectations, then the process starts over again at the top of the graphic. This process can be so time-consuming that the budget cycle may not be complete before the budget period has begun.
There are a number of best practices that can be used to create a more streamlined budgeting process and here I will discuss some of the items I have found useful when building a budget model solution.
- Reduce the number of accounts. The number of accounts included in the budget model should be reduced to only the essential accounts needed for the budget process. By reducing the number of accounts you can greatly reducing the amount of time needed to enter and update data in the budget model.
- Reduce the number of reporting periods. Summarize the 12 month periods shown in the typical budget into quarterly information, thereby reducing two-thirds of the data input required in the budget model. If the budget data must later be re-entered into the organisation’s GL system in order to provide budget-to-actual comparisons, then a simple formula can be used to divide the quarterly budget into its monthly split – which is still much less work than maintaining a full 12 months of budget information.
- Use percentages for variable cost updates. When crucial business activities, such as revenues, are adjusted by management in the budget model, the entire budget needs to be reviewed in order to determine what related expenses should be changed in conjunction with the revenue activities. A much easier approach is to use percentage or assumption based calculations for variable costs, etc, in the budget model so that these expenses automatically update. The manual input items should be colour-coded/highlighted in the budget model, so that they will not be mistaken for items that are automatically changed.
- Report on variables in one place. A number of key variables will impact the typical budget model, such as the rate of inflation in wages, tax rates for income, and employee’s compensation, medical insurance rates, etc. These variables are much easier to find if they are created in a cluster within the budget model structure, so that one can easily reference and update them. Also, it is useful to show results (such as net profits) on the same page with the variables, in order to make changes to the variables and immediately see their impact without having to search through the budget model to find the information.
- Use a budget procedure and timetable. The budget process is known for the many budget cycle iterations. The first results will yield profits or losses that do not meet the management’s expectations. Also, it requires input from all parts of a organisation, some of which may be slow in sending in data on time. Accordingly, it is best to communicate a budgeting procedure that specifically identifies who must send budgeting information to the budget coordinator, what information is required of each person, and when that information is due. There should be a clear timetable of events that is adhered to, so that plenty of time is left at the end of the budgeting process for the calculation of multiple iterations of the budget.
In addition to these efficiency-improvement issues, there are other ways to modify the budgeting process so that it can be completed much more quickly. These items will be discussed in a future post.
Target vs Bottom-up Planning
Target vs. Bottom up Planning
In most organisations, budgeting is highly iterative process, sometimes requiring dozens of budget recalculations and adjustments in assumptions before the best possible results are obtained. There are various ways to streamline and simplify the budgeting or forecasting process, one method involves defining the organisation’s strategy and tactical goals at the beginning of the budget model.
All too often, a planners at Cost Centre level will lose sight of the organisation’s total targets when going through the many iterations that are needed to develop his realistic budget for the Cost Centre. By defining the target and strategy upfront in the budgeting or forecasting model, it is much less likely that the final budget will deviate significantly from the organisation’s original plan.
The Oracle Hyperion Planning tool provides an organisation with the capability to budget in a target (top down) or bottom up method, or to use a combination of the two methods to plan streamline and shorten the budgeting process.
- Target (Top down)
For target versions, planners enter budget data for members at any level in the dimension hierarchy herby defining the organisation’s high level target. Business rules can be used to distribute and allocate values from parent members (high level) to their descendants (lower level).
For example, sales numbers are set at the corporate head office level by the Head of Sales. These figures are then used to drive sales quotas and revenue plans for the organisation. This method of budgeting is often called Top-down or Target Budgeting.
- Bottom up
With bottom up version of the budget, planners enter budget data into bottom level members, and the parent member values are aggregated from bottom level members. The budget process builds a version of the budget from the lowest level of information up to the high-level total organisational plan.
For example, sales numbers are input by the individual employees responsible for doing the selling. They forecast what they think they can sell. These numbers are rolled up to create the total organisation revenue plan. This method of planning is often called Bottom-up Budgeting.
- Combining both Methods
Organisations can use target versions to set high-level targets for the budget model. Planners working with bottom up versions can reference these targets when they enter their department’s budget information. If there is a discrepancy between the top-down numbers and the bottom-up numbers, adjustments are made to the budget until the two versions meet. This solution addresses the challenge of performing top-down and bottom-up budgeting in the same plan.
For more information on Oracle Hyperion Planning:
http://www.oracle.com/technology/products/bi/planning/index.html
Planning before a Planning Project
Today I was invited to a workshop with a potential client to discuss their budgeting and forecasting requirements and explain how the Oracle Hyperion EPM offering could support and optimise their current business process. One of the most invaluable lessons I’ve learned is how important it is to plan before you embark on an implementation of this nature.
Oracle Hyperion Planning is a centralized, Excel and Web-based planning, budgeting and forecasting solution that integrates the financial and operational planning processes of an organisation. Planning provides an in-depth look at the business operations and the related impact on financials, by tightly integrating financial and operational planning models. The ability to input and report budgeting and forecasting data in a central solution is important to analyse and manage any organisation. By including the Capital Expenditures (Capex) and Workforce modules with Planning an organisation can provide a solution for almost any requirement of the business planning process.
But, if an organisation fails to properly plan for the budgeting and forecasting implementation it will be almost impossible to achieve the benefits offered by Oracle Hyperion Planning offering. The following are fundamental items to keep in mind when implementing a new planning solution:
- Clearly defined business processes
- Identify the shortcomings of the existing system
- Focus on Planning
- Management buy in is crucial
Clearly defined business processes
The existing budgeting and forecasting business processes of an organisation should be clearly understood before implementing any solution. Any new business processes identified during the scoping and design of the new solution should be clearly defined and documented at the start of the implementation. The integration of the existing business processes across the organisation into the new budgeting and forecasting solution requires careful planning, it is important to streamline and automate processes to improve efficiency and reduce budget cycle times. Ideally, as the solution matures and users become comfortable with the technology the business processes should evolve as the business needs of the organisation change, for example, changing market conditions.
Identify the shortcomings of the existing system
A successful implementation cannot be built around a flawed or incomplete business process, and by integrating this unsound process into the new budgeting and forecasting solution the project could be delayed or worse, the fully capability of the Oracle Hyperion Planning tool could be compromised. Often these inefficiencies are included only because they have been a part of the process for years, but if the process doesn’t add value or save time. The implementation of the budgeting and forecasting system should also include a review and streamlining of the business processes. Most organisations can identify their biggest pain areas within the budgeting and forecasting process, many acknowledge that the data gathering process is one of the key areas that can be improved. By including the right players in the planning discussions most of the essential items can be identified prior to the implementation.
Focus on Planning
Focus on the main business requirement of the budgeting and forecasting solution. Using the same solution simultaneously for reporting or analysis purposes can be detrimental to the performance of the system. Depending on the business requirements and the system’s complexity certain cost allocations and business rules needed only for reporting or analysis purposes may possibly be done on a separate application optimised for data retrieval and calculations.
Management buy in is crucial
It’s essential to engage with executive management in the preliminary planning discussions and keep them updated right the way through the implementation of the Oracle Hyperion Planning solution. Executive management will sponsor the implementation of the new budgeting and forecasting solution and will ultimately be the audience for the output. Connecting with them upfront and regularly updating them on the status of the implementation will guarantee the solution meets their business needs and expectations.
Implementing a new budgeting and forecasting solution is a big undertaking that demands the input, effort and cooperation of many people across the organisation. Planning and considering the items mentioned above will factor in to the success of the Planning implementation.
For more information on Oracle Hyperion Planning:
http://www.oracle.com/technology/products/bi/planning/index.html
