by David Parmenter - IBM€¦ · 27.01.2012 · This document breaches copyright if it has not been received directly from David Parmenter How to implement quarterly rolling ... The

This document breaches copyright if it has not been received directly from David Parmenter

Extract from the white

paper:

How to implement

quarterly rolling

forecasting and quarterly

rolling planning– and get

it right first time

by David Parmenter


How to implement quarterly rolling forecasting Copyright ©2013 Page 2

By David Parmenter [email protected] www.davidparmenter.com

1. The foundation stones of a rolling forecasting process

There are a number of QRF foundation stones that need to be laid down and never undermined. You need to ensure all the construction of the QRF model is undertaken upon the following foundation stones:

1. Abandoning processes that do not work

2. The QRF model should be built by in-house resources

3. Separation of targets from realistic forecasts

4. A bottom-up process performed quarterly rather than monthly

5. Forecast beyond year-end (e.g., six quarters ahead)

6. The monthly targets are set, a quarter ahead, from the QRF

7. A quarter-by-quarter funding mechanism

8. The annual plan becomes a by-product of the QRF

9. Forecasting at category level rather than account code level

10.The QRF should be based around the main events / key drivers

11.A fast light touch (completed in one week)

12.Built in a planning application – not in a spreadsheet

13.Design the planning tool with 4 or 5 week months

1.1. Abandoning processes that do not work

Management guru Peter Drucker frequently used the word ‘abandonment’. I think it is one of the top ten gifts Drucker gave us. He said

“the first step in a growth policy is not to decide where and how to grow. It is to decide what to abandon. In order to grow, a business must have a systematic policy to get rid of the outgrown, the obsolete, and the unproductive.”

He frequently said that abandonment is the key to innovation. He also put it another way: “Don’t tell me what you’re doing, tell me what you’ve stopped doing.”

In planning many of the processes are carried out, year-in year-out because they were done last year. When staff question why do we do this the answer being “There must be a reason”.

All the previous givens with regards forecasting need now to be challenged and all the inefficient processes thrown out. Here is a list, by no means complete of what needs to be abandoned:

• forecasting in Excel, just because we are good at it

• forecasting in detail, at account code level and to the dollar

• only forecasting to the current year-end as if next year did not exist

• giving budget holders an annual entitlement, they have not got a clue as what the next year is really going to be, nor do we in Finance

• forcing the annual plan to be the same number that the Board want to see - we have just lied!

• a three month process when it can be done in two weeks – both will be wrong. You may as well be wrong quickly!




• setting the monthly targets from the annual plan - since we cannot see into the future this breakdown of the annual plan has always been a stupid activity

• annual plan instructions – nobody reads them and if they say they have don’t believe them.

1.2. The QRF model should be built by in-house resources

The project team must always design the model themselves. You need to use the planning tool consultants more as advisors and trainers and make sure you drive the mouse. The planning tools are relatively simple to use providing the in-house staff have attended in-depth training.

If the model is built by the consultants, not only will the project cost more money, you have the added risk of bringing someone who may not fully understand your business, and who will endeavour to build you a better annual planning model, the very thing you need to migrate away from!

The in-house team has a better chance of designing a model that fits your industry and your decision-making processes than an external consultant. Consultants, with the best will in the world, cannot help but design a model based on their prior experiences, which may be adrift of techniques described in this white paper.

In other words it’s just like learning to drive a car, the team will need a series of lessons and hopefully practise first on “quiet country roads” (pilot the model) before they drive on the motorway (unleash the model to all budget holders).

1.3. Separation of targets from realistic forecasts

In these turbulent times the separation of targets and realistic forecasts is fundamental and a survival necessity. It is vital that the forecasting process generates realistic forecasts rather than forecasts that the Board or senior management want to achieve. This is a major breakthrough proposed originally by Jeremy Hopei.

Dialogue with the Board

We say to the Board “Setting a stretch target, or as Jim Collinsii says “a Big hairy Audacious Goal” (BHAG) is great but you must accept that we might not be able to achieve this. ”Surely it is better to be honest than to put up a make believe annual plan to buy silence.” We understand that the bonuses may well be pegged against the BHAG we thus are not trying to lower the threshold to get the bonus, but merely wishing to inform you of the performance gap so you can think strategically to close it up”.

The Board may want a 20% growth in net profit, yet management may see that only 10% is achievable with existing capacity constraints. The Board then needs to make strategic decisions to manage the short fall. However, if we report what the Board want to hear we are simply hiding the truth. Exhibit 3.1 shows how only in the final quarter do we own up to the real situation, a year-end performance below expectations. In this example Annual Plan, prepared in March for the new year starting in July, is forced to match the BHAG and subsequent forecasts in June, September and December keep up this charade. In reality the truth was always a shortfall, as shown in the dark line.




Exhibit 3.1: Hiding the performance gap

0

50

100

150

200

Mar

XX

Jun

XX

Sep

XX

Dec

XX

Mar

XX

$ms Performance Gap for Year Ending 30/6XX

Annual plan targetAnnual plan reforecastThe truth

The fudged forecast

Mr Forecasting : "I have just updated the forecasts : the forecast EBIT this month is $1.2million"

CEO: "Our budget shows EBIT of $2.0m: go away and review the forecasts but make sure they show an EBIT of at least $2million".

Mr Forecasting: " But when we did the budget we didn't realise that we would have production problems and that the domestic markets would suffer so much from the economic downturn"

CEO: "Don't argue with me: review these forecasts as instructed.... or else"

The end result might be that the forecast gets "fudged" to say $1.5m or $1.6m.

As a respected planning expert said to me.

“Even with foundation stones 2-13 working like clockwork, the end result doesn't benefit from all this good work because all or some of the following factors are in operation: 1) Senior Management is running the organisation through fear.

2) There is no clarity between what can be reasonably achieved

and an unreasonable arbitrary target.

3) Mr Forecasting hasn't the ability to articulate and sell bad news stories as the most likely future outcomes.

“Therefore by getting foundation stone 1 right, you then get the maximum benefit on foundation stones 2-10.” John Poppe

1.4. A bottom-up process performed quarterly rather than monthly

Many forecasts have little input and no buy-in from the budget holders. We do not have the time, process or tools to get the budget holder involved. Instead most forecasts are prepared by the Marketing and Finance team talking amongst themselves and with senior management. I call these forecasts a “top-top” forecast.

There has been a major breakthrough in forecasting from the writer James Surowiecki in his book “The Wisdom of the Crowds”. He points out “a large group




of people are often smarter than the smartest people in them”. The reason being that:

� Much trend information is being seen at the workface, products piling up unsold, product returns, customer comments, etc which is not being tapped

� Less motivation to forecast what management want to see

� A small group of forecasters can only process a tiny fraction of the information available whereas a crowd could take “in an almost unlimited harvest of data”.

This theory was tested by ‘Best Buy’ America’s leading consumer electronics retailer:

� Gift card business: 95% accurate by experts, 99.5% by group average � Holiday season sales for the whole group, 93% accurate by experts, 99.9%

by group average

In another example an internet gambling organization had picked the winner in but one of the States Senate elections. The favourite in each state was a direct reflection of all the bets placed and thus a perfect representation of the collective “wisdom of the crowd”.

In Best Buy the forecasts are now prepared by invited staff who provide anonymous forecasts directly into a system. They are provided with some basic trend information with the incentive of the recognition and a prize if their forecast is the nearest to the actual figure.

Typically management have reforecast the year-end numbers on a monthly basis. Why should one bad month, or one good month translate into a change of the year-end position. We gain and lose major customers, key products rise and wane; this is the life cycle we have witnessed many times. Besides if you change your forecast each month management and the Board know whatever number you have told them is wrong –you will change it next month! As shown in Exhibit 3.2 we now have only four re-forecasts done a year, instead of the twelve updates.

Only businesses that are in a volatile sector would need to forecast monthly e.g., the airline industry. Even for these organisations you do not need to get all budget holders to participate in a monthly reforecast. You may be able to limit this extra work to sales and production with the major all embracing cycle still being quarterly.

Even though you are only updating your QRF quarterly you are still reporting monthly. The year-end forecast figures are held constant for two of the three months every quarter.




Exhibit 3.2: quarterly re-forecasting

Reforecasts of June year-end result

0

150

300

Jul

Aug Sep Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

$ms

Monthly reforecast quarterly forecasts

1.5. Forecast beyond year-end (e.g., six quarters ahead)

Typically corporate accountants have reforecast only to year-end. Two months before year-end management appear to ignore the oncoming year. A foundation stone of a QRF process is forecasting for a rolling period that passes through the year-end barrier. There are various options as too how far forward you go, these include:

� Forecasts always two years ahead –this is particularly relevant where the business is very seasonal and much activity happens in the last quarter

� Forecast six quarters ahead

� Variations such as four or five quarters ahead

I advocate the six quarter ahead (18-month) rolling forecast regime, as it has some substantial benefits that include:

� you see the full next year half way through the current year, e.g. the third quarter forecast can set the goal posts for next year’s annual plan

� the QRF is consistent each time it is performed, as opposed to organisations who always look ahead for two financial years (the QRFs will vary between 15 to 24 months)

� your annual plan is never set from a cold start as you have seen the whole financial year in the previous quarter’s reforecast.

1.6. The monthly targets are set, a quarter ahead, from the QRF process

As accountants we like things to balance. It is neat and tidy. Thus it appeared logical to break the annual plan down in to twelve monthly breaks before the year had started. We could have been more flexible. Instead we created a reporting yardstick that undermined our value to the organization. Every month we make management, all around the organization, write variance analysis which I could do just as well from my office in New Zealand. “it is a timing difference….” “we were not expecting this to happen”, “the market conditions have changed radically since the Plan” etc.

I use a sporting analogy to explain the folly of the monthly budget, Exhibit 3.4. The annual plan is the establishment of goal posts at the end of the pitch, the




budget process is where we set 12 X 10 metre lines to report against, see diagram. The problem is that the 10 metre lines (the monthly budgets) are wrong as soon as the year has started. When there is stoppage, a player fanning injury on queue, management come on the pitch and ask “why are you here you should have been over there”. The reply from the team is “the ball is over here” and this report back on progress is of the same use as our monthly variance commentary, in other words useless.

Exhibit 3.3: Sporting analogy to explain the folly of the monthly budget

We should instead report against more recent targets derived from quarterly rolling forecasting process. This process will give us the monthly targets for the next quarter. It is important to realise that monthly targets are not set any further out than the quarter ahead. In fact information for quarters 3,4,5,6 are set only quarterly. In other words we patiently wait until the relevant quarter is upon us before putting the BHs estimates in the reporting tool.

This change has a major impact on reporting. We no longer will be reporting against a monthly budget that was set, in some cases 17 months before the period being reviewed.

As an organisation matures in this environment targets for departments that respond directly to the customer demands become flexible. Their progress is measured by observing ratios, cost per unit etc., To understand more read Jeremy Hope’s work1 and a book on Toyota2.

1.7. A quarter-by-quarter funding mechanism

The annual entitlement to spend is replaced with a quarter-by-quarter funding mechanism . In this process the management asks, “yes we know you need $1m for the year and we can fund it, but how much do you need in the next three months”. At first the budget holder will reply, “I need $250,000 this quarter”, to which is replied, “Pat, how is this? You last five quarterly expenditures have ranged between $180,000 and $225,000”. “Pat, you are two team members short and your recruiting is not yet underway, be realistic you will only need $225,000 tops”

1 Reinventing the CFO: How Financial Managers Can Transform Their Roles and Add Greater Value,

Jeremy Hope, Harvard Business School Press, 2006

2 “How Toyota Became #1 – Leadership Lessons From The World’s Greatest Car Company” by

David Magee




It will come as no surprise that when a budget holder is funded only three months ahead the funding estimates are much more precise and there is little or nowhere to hide those slush funds.

Using a sporting analogy once more, the “ground staff” then draw these lines on the pitch and management become very accountable about progress, see Exhibit 3.4 below. This process means that the approval process through the senior management team (SMT) will be quicker as the SMT are only approving the annual number and can adjust the quarter-by-quarter allocations as the conditions and environment dictate.

Exhibit 3.4: The new vision

Organisations are recognising the folly of giving a budget holder the right to spend an annual sum, while at the same time saying if you get it wrong there will be no more money. By forcing budget holders to second-guess their needs in this inflexible regime you enforce a defensive behaviour, a stock piling mentality. In other words you guarantee dysfunctional behaviour from day one! The quarterly rolling planning process thus highlights “free funds” which can re reallocated for new projects earlier on in the financial year.

The released funds can fund new initiatives that the budget holder could not have anticipated at the time of the budget round. This will get around the common budget holder dilemma “I cannot undertake that initiative, though we should, as I did not include it in my budget”. In the new regime the budget holder would say “I will put it in my next update and if funds are available I am sure I will get the go ahead”.

This more flexible environment, as long as it is communicated clearly and frequently to budget holders will have good buy-in. The logic of quarterly rolling funding can be shown in an analogy.




The nine year old’s birthday cake

Quarterly rolling funding process has a lot in common with the handling of a nine year old’s birthday cake. A clever parent says to Johnny, here is the first slice, if you finish that slice, and are not going “green around the gills” and want more, I will give you a second slice. Instead, what we do in the annual planning process is divide the cake up and portion all of it to the budget holders. Like 9 year olds, budget holders lick the edges of their cake so even if they do not need all of it nobody else can have it. Why not, like the clever parent, give the manager what they need for the first three months, and then say “what do you need for the next three months” and so on. Each time we can apportion the amount that is appropriate for the conditions at that time.

1.8. The annual plan becomes a by-product of the QRF

With quarterly rolling forecasting one of the quarters also generates the annual plan. The QRF process will allow you to have a quick annual planning process, as:

� budget holders will become more experienced at forecasting ( they are doing it four times a year), they have already looked at the next year a number of times

� The politics is taken out of the annual planning cycle as BHs realise that they no longer obtain an annual entitlement. There is no use demanding more than you need as the real funding is sorted out on a quarter by quarter basis where slush funds cannot be hidden.

� The third quarter forecast firms up both the 4th quarters funding and the annual plan numbers

� The CEO supports the guillotined process

� There is no point spending too much time as the next quarter’s forecast is a more up to date view of the future.

Organisations who have truly adopted the beyond budgeting principles, developed by Jeremy Hopeiii, will also throw out the annual plan target. Why should one view of year-end be any better than a subsequent more current view? The March quarter forecast, which sets the annual plan for a June year-end organisation, is no longer called the annual plan, but simply the March quarter forecast.

1.9. Forecasting at category level rather than account code level

Forecasting at a detailed level does not lead to a better prediction of the future. A forecast will never, and can never be right. As Harry Millsiv says it is better to be nearly right than precisely wrong”. Looking at detail does not help you see the future better, in fact I would argue it screens you from the obvious. I use this analogy to emphasize this important point.

Counting the trees in a forest

Imagine you have drawn the short straw. You have been asked to count the trees in a state forest, one hundred square miles of trees. You have two choices, the detailed way and the “helicopter” way.




In the detailed way you would set up, lets say ten teams of seven people. Each team is given safety gear, camping equipment and provisions for three weeks or so. Each tree counted is spray painted. Each team is given an 10 square miles, satellite navigation equipment, and a different colour of spray paint. The teams finish having updated their count each night on a spreadsheet. At the end we consolidate and, yes you have guessed it, some data is missed out. Some counters in teams 2,4,6,7,&9 forget to load all their sheets into the workbook. The final count is wrong albeit we do not know that.

In the helicopter way we fly above the forest and using satellite imaging we select five sample areas representing one thousandth of the forest. The staff who are now split into five bigger teams count their area in a day. We average the count of the five areas and then multiple by 1,000. The answer is wrong. But it was wrong quickly and is still a good approximation. My advice is always stay in the helicopter when forecasting, unless working in detail is worthwhile, such as forecasting payroll.

Whilst precision is paramount when building a bridge, every small detail needs to be right, a forecast should concentrate on the key drivers and large numbers.

Following this logic it is now clear that as accountants we never needed to set targets at account code level. We simply have done it because we did last year, without thinking as well. Do you need a target or budget at account code level if you have good trend analysis captured in the reporting tool? I think not. We therefore apply Pareto’s 80/20 and establish a category heading which includes a number of G/L codes, as shown on Exhibit 3.5

Exhibit 3.5 How a forecasting model consolidates account codes

Stationery 4,556Uniforms 3,325Cleaning 1,245Miscellaneous 7,654Consumables 2,367Tea & Coffee 2,134Kitchen Utensils 145

21,426 Consumables 22,000

Forecasting by CategoriesForecasting at Account Code Detail

To assist you apply this foundation stone I have developed some rules:

� separate out a forecasting line in the model if an account is over 10% of total expenditure or revenue e.g. show revenue line if revenue category is over 10% of total revenue. If an account code is under 10% amalgamate it with others until you get it over 10%. Thus a category will have a number of account codes within it. This rule applies at budget holder and consolidated forecasting levels.

� limit the categories that BH’s need to forecast to no more than 12

� select the categories that can be automated, and provide these numbers




� map the G/L account codes to these categories – a planning tool can easily cope with this issue without the need for a revisit of the chart of accounts, see Exhibit 1 for an example of this mapping.

When forecasting revenue it is important to remember the counting the trees story. The wrong way is to set up a schedule of every product and get each branch to fill out the details. I have seen one example where the branch had to forecast the units, sales price, discounts for 200 products over 12 months no wonder the accountants were not liked!

The “helicopter way” is to forecast the top five to ten major customers by the major products. All other smaller products are group accordingly and automated based on historical relationships with the major products they have a correlation to. Out of say 200 products you would look for products with over 10% of sales. Have a line for these and automate the rest. A key customer could have as little as eight to ten lines in the model. See Exhibit 4.1 for a template report.

In one workshop I ran for a service sector organisation the group came up with the decision that there would be a maximum of fifteen categories of which seven would be automated, see Exhibit 3.6.

Exhibit 3.6: Categories used in one case study

BH’s forecast only these categories

The categories that can be automated

revenue (3 to 4 categories) operational equipment R&M

salaries & wages ordinary time office equipment & consumables

other personnel expenditure communications costs

health & welfare fleet costs

training & travel accommodation

consultancy fees miscellaneous costs

promotional activities Depreciation

1.10. The QRF should be based around the main events / key drivers

A forecasting tool needs to be based on the main events / key drivers and thus the finance team should be able to quickly inform management of the impact should there be a major change with any of these drivers. In-depth interviews with the Senior Management Team (SMT) coupled with some brainstorming will quickly identify the main drivers which may include:

� what if we contract in size e.g. stop production of one line, sell a business?

� what if we grow through acquisition?

� what if we lose a major customer?

� what if there is a major change to key economic indicators e.g. interest rates, inflation, oil price, exchange rate?

� what if a major overseas competitor sets up in our region?

� what are the plant capacity ramifications from gaining a large increase in business e.g. collapse of a major local competitor?




If you have second guessed the likely SMT requests and have designed the model around them you will have a planning tool that can quickly model the implications of such changes robustly.

American Express found that their forecast has principally based around two drivers, customer numbers and average customer spend.

1.11. A fast light touch (completed in one week)

QRFs should be performed within five working days (see Exhibit 3.7), with the one exception that the fourth quarter forecast, which creates the annual plan (see Exhibit 3.8) will have one extra week for additional negotiations and quality assurance. QRFs can be quick because:

� consolidation is instantaneous with a planning tool

� since you have run a workshop on budget preparation with BHs they know what to do and can enter directly into the planning tool

� the model is based around Pareto’s 80/20 principle, focusing on the major items, events, drivers etc

� the quarterly repetition aids efficiency

� forecasting is at a high level, at category not account code level e.g. only 12 to 15 categories per budget holder

� repeat costs can all be standardised for the whole year, e g Dublin to London return flight € 250, and overnight in London € 280

� as much pre-work is done as possible by the forecasting team

� set the annual planning dates away from school holidays

� offer one-to-one support by expanding the budget team

� only ask for monthly data for the first two quarters

� new funding requests or error prone forecasts require an audience with the Forecast Approval Committee

Jeremy Hope in his book “Reinventing the CFO”v states that there is no reason why the forecast process could not be done in a day in a financial services organization, where there is no physical supply chain and inventories to manage. For more complex businesses, Jeremy Hope, believes these forecasts can be done in several days. Please note this means a quicker forecast than the time I am suggesting.




Exhibit 3.7: Timetable for a seven day forecast

7 day quarterly rolling forecasting/planning proces s

Prior work 1 2 3 4 5 W/E 6 7

Process => Forecast pre-workDeliver forecast

workshop

Budget holders prepare and load

their forecast

First look at

numbers

Submissions by BHs to management board

(does the forecast still go through the goal

posts)

Re-run of forecast and presentation

to CEO

Final alterations and finishing off documentation

Activities =>

Strategic Planning

Attend

Reviewing to ensure linkage to strategic plan,

and advising of any discrepancies

Attend

SMT Set assumptionsFirst look

at numbers

Review submissions etc, full time

Hear presentation

and give instructions for final changes

Finance team

Prepare system, the presentation,

overheads, personnel costs, travel standard

costs etc

Give presentation

to BHs

Help BHs with forecast

(extended team)QA Further QA

Complete preparation and present

forecast presentation

Finish off documentation

BHs Attend Prepare forecastPresent forecast and business plan where

there is a major change

Present to SMT when

called

Document and file all calculations




Exhibit 3.8: Timetable for a ten day annual plan

10 day Annual Planning Process (part of the 4th qua rter's QRP performed in the last month of the 3rd q uarter)

Prior work 1 2 3 4 5 W/E 6 7 8 9 10

Process => Budget preworkPresent budget

workshop

Budget holders prepare and load their forecast

First look at

numbers

Rework some

budgets

Submissions by BHs to management board

Compilation of final draft budget for Management Board approval

Final alterations and finishing off documentation

Activities =>Strategic Planning

AttendReviewing to ensure linkage to Plan, and

advising of any discrepanciesAttend

SMT Set assumptionsFirst look

at numbers

Review submissions etc, full time

Hear presentation and give

instructions for final changes

Finance team

Prepare system, the presentation,

overheads, personnel costs, travel standard

costs etc

Give presentation

to BHs

Help BHs with budget plans (extended team)

QA Help BHs Further QA

Complete preparation and

present AP presentation

BHs Attend Prepare budget AttendPresent to SMT when

calledDocument and file

all calculations



1.12. Built in a planning application – not in a spreadsheet

Forecasting requires a good robust tool not a spreadsheet, built by some innovative accountant, which now no one can understand. Often the main hurdle is the finance team’s reluctance to divorce itself from Excel. It has been a long and comfortable marriage albeit one that has limited the finance team’s performance.

Acquiring a planning tool is the first main step forward, and one that needs to be pursued not only for the organisation’s future but also for the finance team members’ future careers. It will soon be a prerequisite to have planning tool experience, and conversely career limiting to be an Excel guru.

Excel is a great tool for a one-off costing estimate done while awaiting your plane. It is not and never should have been a building block for your company’s key financial systems. As a forecasting tool it fails on a number of counts:

� it has no proper version control, we have all burnt the midnight oil pulling our hair out wondering whether all spreadsheets are the correct versions!!

� for every 150 lines there is a 90% chance of a logic error (from a recent study)

� its lack of robustness (show me a CFO who can be confident of the number an Excel forecast churns out!)

� it cannot accommodate changes to assumptions quickly e.g. what would you do if the CEO asking ”what if we stop production of computer printers, please tell me the impact by close of play today”, I suspect the best thing would be to pray!

� it is designed by accounting staff who; are not programmers, have not been trained in system documentation, quality assurance etc which you might expect from a designer of a core company system.

See Appendix one for how a QRF can be laid out in a planning tool.

New planning tools are being built all the time and this table, on Exhibit 3.9, is certainly out of date at the time of you reading it. The table is not intended to be a comprehensive list as this would be a paper in itself. The following “search strings” will help unearth many applications:

� “planning tools”

� “quarterly rolling forecasting” + “applications”

� “forecasting tools” + “rolling”



Exhibit 3.9: Some of the planning tool providers and their applications

Company Package Name Web address

Adaptive Planning Adaptive Planning Software

www.adaptiveplanning.com

Alight Planning Continuous Planning & Scenario Analysis

www.alightplanning.com

BOARD International BOARD www.board.com

Castaway Castaway www.castawayforecasting.com.au

Business Forecast Systems, Inc

forecastpro www.forecastpro.com

Epicor Epicor Financial Management solutions

www.epicor.com

Host Analytics Host Analytics www.hostanalytics.com

Infor Infor PM www.infor.com.au

IBM IBM® Cognos® TM1™ www-01.ibm.com

Maxiplan Maxiplan cascade Planning

www.maxiplan.com.au

Microsoft Dynamics GP

Microsoft Forecaster www.microsoft.com/en-us/download/details.aspx?id=10707

Mondelio Mondelio www.mondelio.com

Oracle Hyperion Planning www.oracle.com

Planguru planguru www.planguru.com

PROPHIX Software Inc.

prophix10 www.prophix.com

Rocket CorVu CorVu Rocket software www.corvu.com

Sage Sage 50 www.sage.ie

SAP Business Objects www.SAP.com

SAS SAS Financial Management

www.sas.com

Tagetik Tagetik 4 www.tagetik.com

Vanguard Forecast Server™ www.vanguardsw.com



1.13. Design the planning tool with 4 or 5 week months

Julius Caesar gave us the calendar we use today. It is a major hindrance to forecasting. With the weekdays and number of weekend days, in any given month, being different to the next month it is no wonder forecasting and reporting is unnecessarily compromised.

In my whitepapervi on “Quick Month-End Reporting, by Day Three or Less” I argue that closing off at the weekend can be done for all sectors; some will require more liaison than others. It would also make a big positive impact in the public and not-for-profit sectors.

I believe all forecasting models should be based around a 4,4,5 quarter e.g. there are two four week months and one five week months in a quarter. This should be regardless of whether the monthly reporting has moved over to this regime as you will find calculating the following much easier:

• Forecasting revenues - for retail you either have four or five complete weekends (the high revenue days)

• Payroll is easy, either four weeks of salary or five weeks of salary

• Power, telecommunications, property related costs can be automated and be much more accurate than a guess

• For monthly targets you can simply adjust back based on calendar or working days

• Design the model so that the smoothing back to Julius Caesar’s calendar can be removed easily once you have seen the light and have a 4,4,5 reporting quarter

In any given year between three and five months every year will end on a weekend, and finance teams often find that the month-end processes are smoother for these months. Why not close-off on the last or nearest Friday/Saturday of every month like many U.S. companies do? The benefits of this include precise four or five week months, which make comparisons more meaningful, and there is less impact on the working week as the systems are rolled over at the weekend.

Closing off at the weekend can be done for all sectors; some will require more liaison than others. It would also make a big difference in the public and not-for-profit sectors.

You need to choose is it to be the last Saturday or the nearest Saturday, last Sunday or nearest Sunday to month end etc.. The last Saturday can have you closing six days before month-end, whereas the preferred option of nearest Saturday will only be a maximum of 2 working days out. See Exhibit 3.10 for a table.

Exhibit 3.10 Closing on the same day each month

Dates for a Friday Close

(nearest to calendar

month-end) A/P close A/R close

Fixed

assets

close

Inventory

close

Friday, 30 September 2011 noon 30

Sept

5pm 30

Sept * 23-Sep

5pm 30

Sept*

Friday, 28 October 2011 ditto ditto ditto ditto

Friday, 25 November 2011

Friday, 30 December 2011

Friday, 27 January 2012

* may need to move to noon if

numbers cannot be ready

immediately

To make progress in this area I would recommend the following:

• first contact your general ledger supplier and ask “who is a very sophisticated user of this GL and who uses 4,4,5 reporting months. Arrange to visit them and see



how it works for them. Ask them “Would you go back to Julius Caesar’s calendar reporting?” They will give that look to say are you mad.

• talk to the audit ramifications with the auditors, as they will have handled it before. At year-end the missing day of income (two days on leap year) and balance sheet movement will be taken up in the auditor’s “overs and unders” schedule. You simple close on 29th December but call the year to the 31st December. The misstatement will be lost in the roundings.

• I would not inform the Board. You simply present to the Board December’s result and balance sheet. You do not need to highlight the 29th December close.

By making this change you are beginning to create “12 non events a year,” the “El Dorado” of all corporate accountants.

2. Writer’s biography

David Parmenter is an international presenter who is known for his thought provoking and lively sessions, which have led to substantial change in many organisations. He has spoken in over 30 countries and in most continents in the world. Besides delivering in-depth workshops he has been a keynote speaker for the IBM Finance Forum, The World Capability Congress, TEC Malaysia, and Profiles International Romania. David is a leading expert in: the development of winning KPIs, replacing the annual planning process with quarterly rolling planning, quick month-end processes and making reporting a decision based

tool.

John Wiley & Sons Inc have published his four books, including “Winning CFOs: Implementing and Applying Better Practices”, “The leading-edge Manager’s guide to success – strategies and better practices” ,“Key Performance Indicators – developing, implementing and using winning KPIs” and “Key Performance Indicators for Government and Non Profit Agencies”.

David has also worked for Ernst & Young, BP Oil Ltd, Arthur Andersen, and Price Waterhouse. David is a fellow of the Institute of Chartered Accountants in England and Wales.

He has written over 50 articles for the accounting and management journals. He has won two ‘article of merit’ awards from the International Federation of Accountants. (2007 and 2009). His published articles titles include: “Quarterly rolling planning - removing the barriers to success”, “Throw away the annual budget”, “Beware corporate mergers”, “Implementing a Balanced Scorecard in 16 weeks not 16 months”, “Convert your monthly reporting to a management tool”, “Smash through the performance barrier”, “Is your board reporting process out of control?” “Implementing winning Key Performance Indicators”, “Quick month end reporting” “Conquest leadership- lessons from Sir Ernest Shackleton” “Should we abandon performance measures?” “Putting the finance team on the map” etc.



i Hope, Jeremy “Reinventing the CFO: How Financial Managers Can Transform Their Roles and Add

Greater Value”, Harvard Business School Press, 2006

ii Collins, Jim and Porras, Jerry “Built to Last – Successful habits of Visionary Companies” Harper

Business 1994

iii Reinventing the CFO by Jeremy Hope Harvard Business School Press ISBN 1-59139-945-9

iv Mills, Harry “Artful Persuasion: How to Command Attention, Change Minds, and Influence People”

AMACOM 2000

v Hope, Jeremy “Reinventing the CFO: How Financial Managers Can Transform Their Roles and Add

Greater Value”, Harvard Business School Press, 2006

vi Parmenter, David “quick month-end reporting, by day three or less” White paper,

www.DavidParmenter.com, 2013

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