A review of the contenders for the planning crown
Anders Liu-Lindberg
Leading advisor to senior Finance and FP&A leaders on creating impact through business partnering | Interim | VP Finance | Business Finance
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Planning may not, after all, be dead. We know that it is the foundation of corporate strategy. It is the original map drawn up to reach the goals set by the enterprise, the reference document to ensure that progress is made. We also know that it cannot guarantee success in isolation. Agility and flexibility are vital ingredients, alongside a strategic mindset that takes account of the operational environment.
What planning techniques can be harnessed to deliver the detailed roadmap and reference document while enabling an agile response and giving the organization a chance to pivot when the need arises?
There are a handful of contenders.
Let’s have a look at each of them.
The contenders
The vast majority of companies are still using traditional budgets, first employed almost two hundred years ago. Budgeting is a vast and complex task that reflects the organization it serves. It can take months to finalize the budget, going through all the internal processes to reach something approximating to a roadmap for the year, three years, five years, or beyond.
The advantage of a budget is its familiarity. Everyone has some understanding of what the budget does and what it means to them, whether it’s their guide to what is expected or the benchmark against which their performance is judged.
Unfortunately for the finance function, the time and effort expended on budgets often detract from the value-added activity and effective business partnering. Budgets still need to be flexed through the year for effective performance management, especially as, after a long preparation cycle in a rapidly changing world, even Month 1 may be out of date when it’s implemented - let alone Month 12 and beyond.
Rolling forecasts evolved to try and solve this problem. The intention was to respond rapidly to a changing environment, to take opportunities as they arose and build them into the plan. The intentions are worthy, but a rolling forecast is in danger of becoming a never-ending budget cycle.
If not properly managed, the finance function’s commitment to constant forecasting can smother its value creation activities. Processes reliant upon traditional budget cycles must also be updated to take account of rolling changes. One of the aspects that can be overlooked is performance management. People need to know on what criteria they are being judged, and regular changes can throw the incentive system into disarray.
The third contender, driver-based forecasting, looks at planning from a whole new angle. The budget cycle is still vital. Performance can still be benchmarked. But the agility that is required can be achieved at a granular level, adjusting for changes in resources and activities. It’s not an easy process to set up, as it requires a thorough understanding of the value-added effect of each driver. It can be counter-intuitive and time-consuming but provides a worthy tool for scenario analysis and agile responsiveness lacking in traditional budgeting or rolling forecasts.
Moving towards a new paradigm
All three of the main contenders for the planning crown have their pros and cons. None are perfect, but each brings something valuable to the table. How can we harness the best of each approach and develop a new paradigm for planning? We’ll look at this in more detail in the next article.
We’d love to know more about your experiences of planning methodologies and the positive aspects you would take forward. Let us know your thoughts.
This was the third article in the series "Planning as we know it is dead". You can read the previous articles in the series below.
While you await future articles why not read our latest series "FP&A Transformation Talks" below.
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Anders Liu-Lindberg is the co-founder and a partner at the Business Partnering Institute and owner of the largest group dedicated to Finance Business Partnering on LinkedIn with more than 10,000 members. I have ten years of experience as a business partner at the global transport and logistics company Maersk. I am the co-author of the book “Create Value as a Finance Business Partner” and a long-time Finance Blogger on LinkedIn with 70,000+ followers and 150,000+ subscribers to my blog. I am also an advisory board member at Born Capital where I help identify and grow the next big thing in #CFOTech.
Helping Finance Managers of ‘busy’ SMEs improve profits | Turnaround 'busy' loss-makers | Improve profits of the already profitable | A proven step-by-step process | 90-day projects | Training & Coaching throughout |
2yIt can be difficult to move Management Teams away from Annual Budgeting. I can remember, on one occasion, giving a presentation called "Make our last Budget our LAST Budget. to the Management Team of a division of a large corporate. The idea it put-forward was to move from Annual Budgeting to Quarterly Rolling Forecasts. It got many appreciative 'nods' - but after (not a lot of) consideration - 'No change'. 👎
Director Wharton FP&A Certificate Program | Corporate FP&A Trainer | ex. P&G, Unilever, Squarespace | 100k Finance Audience
2yA framework that has served me well in the past when I had to decide which large project to undertake is this: „Would there be any advantages to me or to the company if the project fails to achieve it‘s main objectives?“ In the case of planning, the main objectives are linking strategies with concrete action plans and producing a P&L that can serve as a valid benchmark to measure performance against. So, set up the planning process in a way that even if it doesn’t fully achieve these objectives you are still benefiting. For example, you create scenarios that allow for faster decision making, build your understanding of critical business drivers, or review if any strategies need to be adjusted or scrapped. Great food for thought, thanks for sharing Anders!
Finance Transformation Specialist | Delivering Finance Digitalisation: Efficiency & Effectiveness Improved +100% | Business Intelligence & Budgeting / Forecasting Technology | FP&A Thought Leader🌟 See recommendations⬇️
2yPlanning should not die! Failing to plan is planning to fail! It may evolve in to something more hybrid but not die for sure! 😊