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Building a World Class Budgeting and Forecasting Process

  • By Nilly Essaides
  • Published: 10/21/2015

forecastlinesDENVER -- In a presentation at the 2015 AFP Annual Conference Tuesday, Ethan Carlson, founder and CEO of Carlson Management Consulting, and Vinay Mehra, CFO of PBS’s largest content producer, WGBH, provided an overview and a case study of how companies can build a best-in-class budgeting and forecasting process—FP&A’s bread and butter.

For meeting today’s challenges, said Carlson, “the traditional process is too slow. A budget that takes three to five months to complete is outdated and too detailed, using models that are often too complex and technology that’s not ideal.” According to Carlson, most companies still rely on Excel spreadsheets. “One client we worked with had 1,000 spreadsheets for their budget,” he said. “That’s really prone to error.”

Upgrading the process

Carlson recommended several steps to build a better process:

  • Have a world-class mindset. Have a vision of where the process should be and act as a champion of change within the finance group.
  • Move from tactical to strategic thinking. “Commit to change the focus from number crunching to strategic thinking,” Carlson said. The key is to make the transition by making the basic processes more efficient, make sure people are aligned with their new roles and rely on holistic data.
  • Focus on promoting transparency and visibility. Finance should attempt to make the process and the numbers visible and transparent to business leaders. Explain what the numbers mean, Carlson stressed. “Make the information more transparent, otherwise you can’t build credibility,” he said.
  • Engage all areas of the business. Make the forecasting and budgeting process a truly collaborative one. Gather input from operations in a meaningful way.
  • Embrace technology. Spreadsheets only go so far. “Look at how technology helps increase capability and visibility,” Carlson said.
  • Redefine the role of finance. Finance should be central to the governing process rather than a peripheral and reactive player.
  • Focus on the material. According to Carlson, FP&A should align its objectives with what matters to the business. “Focus on what’s important,” he said.

Adopting this approach may be easier said than done. At the session, an onsite poll showed over 60 percent of attendees said they still lack the time to properly analyze data.

Key steps to success

While there are broad steps companies can take, there are some very practical aspects to improving the forecasting and budgeting process.

  • Transition to driver-based modeling. Driver-based models link operating metrics to financial results. They allow FP&A to get a full view of what’s driving performance and use those drivers to preview key KPIs and create a playbook.
  • Use the outcome of the models to produce actionable information. Use scenario analysis to come up with multiple possible outcomes and be prepared in case they materialize.
  • Align companies’ goals to broad KPIs, so the budget matches strategic objectives. Then drive those KPIs down to individual performance goals so everyone is on the same page.
  • Speak the right language. Finance is a foreign language to many in marketing and sales and other functions. Build a common language and learn about the business. At the same time increase the business’ finance literacy.
  • Develop internal and external expert groups. That means not only assembling the right teams in-house but also creating user groups outside the company who can provide valuable insight.

Leverage technology

Finally, according to Carson, FP&A must leverage the right technology tools if it wants to develop world-class processes. Today, that primarily involves relying on cloud-based solutions. “We’ve made a lot of progress toward cloud-based solutions,” he said. Eight years ago he needed 20 slides to explain cloud-based offers. Now he relies on two.

The quick poll of the group showed 21 percent already implemented a cloud solution and another 60 percent are considering it. Just over 20 percent felt it was too risky.

“The benefits,” Carlson pointed out, “are that it eliminates silos, enables collaboration, empowers individuals and speeds up the implementation process significantly.” Additionally, cloud solutions are quicker to accommodate company and industry change.

Case Study: WGBH

Vinay Mehra began working as CFO of WGBH in 2008, when the company had total revenues of $150 million, as the largest content contributor to PBS. Since then, it has grown to $350 million, mostly on the strength of British drama Downton Abbey. When he started in the role, he had to build finance from scratch. The first order of business was to understand whether they were making money and in what areas. To get there, Mehra started a zero-based budgeting process that has allowed the business to examine its cost based and free up over $2.9 million in expenses. The cost part of the business is the most controllable. “We use historical data and map that out,” he said.” That exercise happens three times a year.

“The revenue side is less predictable” he said, since the enterprise relies on membership fees and cannot use advertising revenue streams. “Revenue can be projected but it’s less controllable,” he noted.

The forecasting process is conducted on a monthly basis. The company does not have an official budget. Instead, it relies on its rolling forecast. The driver for this approach has to come from the top, according to Mehra. “The continuous planning is really my philosophy,” he said. The organization has a single ERP and all the planning is done through Adaptive Insights. “I get real-time information,” said Mehra.

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