best practices in budgeting & rolling forecasts practices in rolling forecasting and budgeting...

Business Analytics

Welcome

Best Practices in Rolling Forecasting and Budgeting seminar

This morning’s agenda

9:30 Welcome & Introduction

Andy Nelmes, Program Director, FPM Product Management,

Business Analytics, IBM

9.45 Forecasting in Turbulent Times

David Morton - Financial Performance Management Consultant

11.00 Coffee

11.20 Best Practices in Implementing a Rolling Forecast

12.00 IBM Planning Analytics demonstration

Colm Kenneally - Financial Performance Management Technical Sales, IBM

12.30 What do the latest research findings from FSN say about Planning,

Budgeting and Forecasting?

Gary Simon, Chief Executive of FSN* and Leader of the FSN Modern Finance

Forum on LinkedIn

1.00 Lunch (close 1.45)

The worlds largest

Taxi company…

Owns no vehicles.

The worlds largest

accommodation company…

Owns no real estate.

The worlds largest

Retailer…

Carries no inventory.

The worlds largest

Media company…

Creates no content.

Disruption is upon us

- David Christopher Morton, Financial Performance Management Consultant

Forecasting in Turbulent Times

The technologies that CxOs expect to revolutionize business tomorrow are already in play today

CFOs’

opportunity:Be the agent

of innovation and

profitable growth

SecuritySecurity has emerged to become the top risk . 1

Social businessContent collaboration in the public cloud is expected to experience a strong

CAGR of 23.1%, while on-premises growth is flat at 0.8%.3

Next-generation analytics"By 2020, predictive and prescriptive analytics will attract 40% of enterprises'

net-new investment in business intelligence and analytics“. 2

Big dataThe digital universe will grow to 1.8 zettabytes (ZB) in 2011, up 47 percent

from 2010 and rocketing toward more than 7 ZB by 2015.3

Mobile enterpriseBy 2018, 5 million people will have enterprise-confidential information on

their smart watches . 2

Cloud computingBy 2018, 50% of the applications running in public cloud

environments will be considered mission-critical. 2

1 IBM 2015 C-Suite Study.

2 Gartner

CFOs report they use sophisticated, enterprise-wide tools to support Finance one-third of the time

Intuition Spreadsheet ERP Analytic tool

14% 52% 19% 15%

50% 100%0%

Capabilities/tools used to support Finance

Source: Question CFO6--What capabilities / tools does your organization use for the following activities?

“For 55 percent of companies,

their budget assumptions are

useless by three months into

the new year.”

Budget

approved

Speed and agility do not match the marketplace volatility

Forecast Forecast Forecast

Source: APQC

2013 Budget

Staff leverage is weak

Providing value-added

analysis

Collecting and validating the data

Administeringthe process

30%23%

Source: APQC

Forecasting has never been a more critical process......

Plan/ Budget is what we

would like to happen

Forecast is what we

think will most likely happen

A good example of forecasting

http://www.bbc.co.uk/weather/

▪Fact based

▪Forward looking

▪Flexible

▪Greater detail for nearer term

▪Focused on risks and opportunities

Admiral Robert Fitzroy(1805 – 1865)

„The end result ... is not an

accurate picture of tomorrow,

but better decisions about the

future.“Peter Schwartz, The Art of the Long View

The traditional approach...

J F M A M J J A S O N D

The traditional template?

How many spreadsheet links?

http://www.clusterseven.com

Opportunities in Forecasting

▪What are you currently using to prepare your budget?

▪What are some of your biggest challenges?

▪What is the reputation of the forecast process in your

company?

▪What would you like to improve?

Does the Budget process have value?

"We used to have what we called the annual plan, and we'd

spend six months of the previous year putting it together,

as soon as the budget was approved it was out of date. So

we decided to do away with it.“Neal Vorchheimer,

Senior vice president of finance for North America

UNILEVER

(CFO magazine May, 2011)

http://www.cfo.com/printable/article.cfm/14570220

Best Practices in implementing Rolling Forecasts

What is a Rolling forecast

J F M A M J J A S

O N D J F M A

M JQ1 Forecast

Traditional

forecast

Q1 Forecast

Rolling

forecast

Some key points:

• Consistent time horizon

• Reduced reliance on outdated budgets

• Faster budgets

• Higher likelihood of objective forecast as focus on year-

end is reduced

• Increased business awareness...more to come on drivers

Top Performers Planning vs Peers

Hackett Group - Global EPM Study 2011

Companies who have reduced reliance on annual budgets and changed to rolling forecasts include:

▪American Express, American Century Investments, Bank of

Scotland, Credit Lyonnaise, Svenska Handelsbanken,

Clements International.

▪Unilever, Brown Boveri, Belron, Borealis, Electrolux, Ford,

Volvo.

▪Cisco Systems, Microsoft.

▪Norton Lilly International, DHL, Federal Express.

▪British Petroleum, Shell, Statoil.

There are several success factors

Time Horizon Participation Modeling

Risk &

Uncertainty MeasurementCulture

„A rolling forecast is a 12 month quarterly process.“

No, it depends on your business!

Match the time horizon to the rhythm of your business

Short cycles

▪Consumer electronics

▪Retailing

▪ Investment banking

Long cycles

▪Oil exploration

▪Pharma development

▪ Infrastructure investmentInd

unctio

▪Advertising

▪Cash flow

▪Overtime

▪Plant construction

▪ Infrastructure investment

▪Research & development

An example….

Economic

relevanceVariability Speed of

response

Revenues High High High

Labor costs High Low Medium

Fuel costs High High Medium

Maintenance spending Medium Medium Medium

Advertising spending Medium Medium High

Aircraft ownership costs Medium Low Low

Airport rates and charges Medium Medium Low

Other operating Medium Medium Medium

Update frequency

Forecasthorizon

Daily Quarter

Twice monthly Six months

Weekly Quarter

Twice monthly Six months

Monthly Six months

Quarterly Year

Weekly Six months

Twice monthly Quarter

Common Time Horizon decisions*

▪Airline: Rolling 2 quarters; monthly

▪Semiconductor: Rolling 2 quarters; twice per quarter

▪Automotive: Rolling 2 quarters; quarterly

▪Chemical: Rolling 2 quarters; monthly

▪Telecom: Rolling 4 quarters; monthly

▪Technology: Rolling 4 quarters; quarterly

▪Engineering: Rolling 6 quarters; quarterly

▪Consumer goods Rolling 6 quarters; monthly

▪Pharmaceutical Rolling 6 quarters; quarterly

* The Hackett Group 2008

An example of the time horizon decision

„Best practice companies are moving towards more

frequent & event-drivenupdates.“

But this typically requires a continous collection process

Infrequent &

Manual

Continuous &

Automated

version

Update

Models

Actuals

Distribute

Models

Collect

Aggregate

Report &

Analyze

What-if &

Optimize

The Challenge

Time Horizon Participation

Measurement

Modeling

CultureRisk &

Uncertainty

Who creates the forecast?

High participation creates value.

Marketing

And let’s not forget!

Accountability

Transparency

Time Horizon

Measurement

Participation Modeling

CultureRisk &

Uncertainty

Remember this model?

Can we answer critical questions with this information?

● Risk

● Opportunities

● Customers

“What they needed to identify were the volume drivers, those that influenced 80 percent of the numbers. This turned out to be only fifteen lines on the profit and loss statement.”

Gary Crittenden –CFO of Amex when they implemented Rolling Forecasts

Focus on the critical few, not the routine many

A simple test for selecting the right items

The same applies to your time horizon

Today … Hourly Forecast

3 days time … every 3 Hours

5 days time … day and night

Do YOU forecast and plan like this?

Probably not......you think about events & intiatives

SummerVacation

Plane Tickets£550

Hotel£430

Food£260

Entertainment£300

HomeImprovement

Lawn Mower

£950Fertilizer

£50New Appliance

MonthlyExpenses

Food£760

Utilities£950

Other£320

Think about initiatives

List potential tactics

Screen the most

promising

Watch for infeasibilities

Benchmark to identify

opportunities

The language of our forecasts need to change

634172 – Revenue (New Accts)

665891 – Office Supplies (Paper)

665892 – Office Supplies (Pens)

677199 – Gifts, Misc.

Campaigns

Pipeline

Number of employees

Customer Satisfaction

Revenue?

Time Horizon

MeasurementCulture

Risk &

Uncertainty

The Forecast?

PlaceYour Bets

What if?

Considering Uncertainty

But developing scenarios can be very tedious

• Multiple scenarios

• Floating assumptions

• Data volumes

Consider a simpler approach

Upside ExceptionsBase Case (most likely)Downside Exceptions

Consider a simpler approach

1,000 6001,400

Volume

Risk analysis based on statistical models

▪New product

▪Estimated demand: 1,000 units +/- 10%

▪Order: 1,000 units

▪Most likely profit margin: $10

▪Estimated Profit?

A.$10,000

B.More then $10,000

C.Less than $10,000

Margin

Risk analysis based on statistical models

World of Watson 2016 57

The leaders are ahead in using

advanced analytics for decision support

Usage of Predictive / Prescriptive Analytics

Source: IBM Market Development & Insights, Finance Analytics and Cognitive Customer Research, June 2016

Financial planning and budgeting

Cash forecasting

Profitability / margin analysis

Enterprise risk management

Fraud, waste & abuse

New products / services identification

Mergers & acquisitions

All others

Most effective Finance organizations

Time Horizon

Measurement

CultureRisk &

Uncertainty

Nice forecast. But I don‘t

like the revenue numbers.

They are too low.

But this is the most

realistic estimate I can

provide!

Please go back to your

office and come back

with new numbers.

Sandbagging?

… to intentionally understate one's strength,

with the intention of deceiving one's opponents into overreaching.

http://sandbaggersanonymous.blogspot.com/2006/12/what-is-sandbagging.html

Is there evidence of sandbagging?

Source: ACCA Webinar Mar 26, 2013. 649 responses

A typical case of sandbagging: Revenue forecast

Forecast substantially

lower than Actuals

Management sets the tone

“Okay, clearly things have changed.

• What are the drivers of the change?

• What is the impact on our business?

• What actions should we be taking?”

“Why didn’t we anticipate

that in the budget? Who

screwed up?”

“The forecast’s key role in

management of the company means

it must be brutally honestwhether we like what we see or not.”

Bjarte Bogsnes, Project Manager, Statoil

A different approach is often required

Purpose of the

Forecast

Assessment of your

processes

New Compensation

Approaches

Time Horizon

Measurement

CultureRisk &

Uncertainty

Some measures you should consider

Forecast Accuracy – Select the appropriate term

Month 1 Month 3Month 2

Forecast – 2 months

Actuals – 1 month

Forecast – 1 month

Actuals – 2 months

Forecast Accuracy - useful in different ways

Discover potential bias

{ 5% gap

Model issues

Attention

Consider using a Run Chart

Forecast Accuracy - error

Forecasting Accuracy

Hackett Group - Global EPM Study 2011

Time Horizon

Measurement

CultureRisk &

Uncertainty

Rolling Forecasts are not a silver bullet

▪No one-size-fits-all approach

▪Forecast culture required

▪Changes to models required

▪Technology upgrades

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