Tactical issues & best practice solutions in budgeting: in an ideal world, forecasting and budgeting processes and systems become embedded at the operational level and become normal management tools; technology now makes that possible.

Ask most CFOs and finance directors to describe an ideal forecasting and budgeting process, and they'll likely portray it as part of an overall integrated performance management framework, ultimately driven by value based measures. And, they'll admit that this vision involves a significant transformation from the capabilities in their organization--which can take three to five years to fully implement and embed.

Meanwhile, finance organizations face a more immediate problem: legacy systems and processes that have been in operation for 10 years or more are often broken. And, despite significant efforts, they can no longer support the dynamic changes affecting the business.

The good news is that "tactical solutions" deliver significant and usually exponential benefits, resulting in quick wins and visible benefits. However, tactical initiatives also require strong executive sponsorship, a robust and proven approach, a persuasive business case and a significant change in the way an organization views and operates its forecasting and budgeting process.

Start with Articulating the Issues

While issues involved with an organization's existing forecasting and budgeting processes and systems are often known, it is a good starting-off point to fully document and communicate the impact of each. This is especially true since many of the benefits of transforming the status quo are qualitative, and focus on accuracy and accountability. It's useful to consider seven such issues.

1. Frequency and Timeliness. Annual forecasting and budgeting cannot keep pace with today's dynamic business environment because the information produced is often out of date and irrelevant. Managers need the ability to understand and respond quickly to the impact of competitive forces and rapid changes, yet most fail to forecast the financial impact of these changes fast enough. The end-to-end process takes too long, given that the impact of any change to the financials needs to be understood within the day or even the hour.

2. Flexibility. Most forecasting and budgeting processes and systems lack sufficient flexibility to accommodate the reorganizations, divestitures, mergers and acquisitions that bare become the hallmark of contemporary business. These changes need to be modeled and reflected within the systems, both going forward and also retrospectively, to ensure relevant prior year comparisons.

3. Cost and Effort. The cost of existing processes is significant and appears to be growing every year. Accenture's "Planning for Value" research study, conducted with Cranfield University, found that the budget process for lower-quartile companies takes longer than six months. Similarly, $1 billion companies take, on average, 25,000 person-days to complete their budgets.

4. Accountability and Ownership. The finance function is so involved in forecasting and budgeting that it becomes the owner of the process rather than the facilitator. "These are not my numbers" is a regular cry heard from operational management reviewing forecasts and budgets.

5. Transparency and Access. Operational managers may receive little or no feedback after the numbers are submitted, and thus, cannot easily view the forecast and budget information presented to senior management. Also, they're often unable to access the data for modeling or examination. So, they see the process as an effort by the finance function to collate and aggregate bottom-up data, turning it into "just another management request for information."

6. Accuracy. Despite technological advances, most organizations use a patchwork of spreadsheet models to undertake their forecasting and budgeting, with multiple hand-offs and revisions. Inaccuracies arise due to lack of version control, transposition of numbers and unallocated numbers, with aggregated data that does not equal the sum of their parts.

7. Finance Skills and Morale. Trying to manage such a problematic process often takes a toll on those involved and hurts the perception of the finance function. Though forecasting and budgeting is managed and operated by highly qualified finance professionals, the function can be relegated to nothing more than a factory for producing numbers.

Applying Best Practices

While much has been written about budgeting and forecasting best practices, most has been academic--until recently. Now, technological advances offer new capabilities to deliver the much-needed performance, such as the following best practices that are increasingly being adopted by organizations:

* ROLLING FORECASTS. Traditionally, the budget process has been a one-off event--albeit a long and arduous one--and the forecasts, though more frequent, remain as a series of one-off quarterly events. Significant gains can be made from eradicating this single period/annual mindset and moving to a rolling forecast approach. This approach offers several benefits, as it:

* Reduces or eliminates the traditional approach of the previous period, plus an uplift. This forces individuals undertaking the forecasts to update business projections monthly and embed the activity in procedures.

* Helps to eliminate the annual mindset and focus on the current year, acknowledging that the business functions as an ongoing operation and needs to be managed accordingly.

* Provides a continual 12-month business outlook, enabling management to take remedial action as forecast business conditions change.

* Eliminates the unrealistic December-to-January gap that appears when next year's budget is "calendarized" for the first time.

* Reduces or potentially eliminates the annual budgeting process. At the normal budget time, management will already have a good idea of what the following financial year will look like from its latest rolling forecast.

In reality, the organization may be unwilling to completely discard quarterly forecasting or annual budgeting activities. Indeed, more detail may be required due to external reporting requirements. Rolling forecasts do not remove this need, but they do provide management with timely information to support business decisions. Over time, the existing spiked quarterly effort will--and should--reduce as the rolling forecast becomes embedded in the monthly management of the business.

* INCREASED PARTICIPATION. Driving down the forecasting and budgeting process to operational managers has gained ground as the best way to ensure accurate and reliable forecasts. Historically, any suggestion of this approach would have been met with disbelief and visions of even more data aggregation, longer cycle times and increased manual handovers.

However, technological advances--particularly the Internet--have created a number of solutions that are highly scalable to hundreds and thousands of end-users, enabling forecasting and budgeting capabilities to be placed in the hands of operational employees. The advantage: those who can produce the best projections of business activities are those who undertake and are responsible for those activities.

* DETAIL LINKED TO ACCOUNTABILITY. The ability to link detail to those items that end-users are accountable for and control will likely increase accuracy as operational managers forecast or budget items that they manage and discuss on a day-to-day basis.

* DRIVER-BASED. Driver-based forecasting and budgeting enables the underlying business model to be encapsulated within a standardized and structured forecast and budget capability. The benefits can be significant. This approach: 1) releases potentially hundreds of business users from building and maintaining individual, usually spreadsheet-based, forecast and budget models; 2) allows common parameters to be incorporated within the models, eliminating the need for end-users to forecast items for which they are not responsible; 3) ensures transparency and provides modeling capabilities to operational managers; and 4) provides management with the confidence that forecasts and budgets are derived from one common modeling methodology and set of algorithms.

* END-USER ANALYSIS. Advances in forecasting and budgeting applications enable analysis and reporting capabilities--not just data collection--to be deployed to a larger and widely distributed base of operational end users. This requires upfront investment to understand the business requirements of both operational management and senior management, and ensures that operational managers receive a model with reporting and analytical capabilities that help them run their local business.

While no one best-practices process solves all of an organization's issues, leveraging a combination of those discussed enables operational managers to adopt the required processes as key management tools. Ideally, forecasting and budgeting processes and systems become so embedded at the operational level that aggregating results for management is merely a byproduct of operational managers using the tools in their normal routines.

Stephen W. Hunt (stephen.w.hunt@ accenture.com) is a senior manager in the Accenture Finance & Performance Management service line. His expertise is in forecasting and budgeting, and he consults with clients in several industries.