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Realising the value of budgeting and forecasting through priorities, processes and accuracy measurement.
2012
CFO Budgeting Survey
2 PwC Luxembourg
CFO Budgeting Survey 1
Contents
Foreword 2
Introduction 3
Financial management priorities 4
Key challenges and trends in financial planning 6 Time-consuming,inflexibleprocesses 6
Seekingtherightlevelofdetail 8
Atendencytowardconservatism 10
Boostingforecastaccuracy 12
Ablendoftop-downandbottom-upapproaches 14
Rollingforecastingastheemergingstandard 16
Technology,process,andorganisationalimprovements 17
Cross-functionalcollaboration 19
KPI’sareimportantindicatorsoffinancemeasurementpriorities 19
Conclusion: Improving financial planning brings long-term benefits 20
2 PwC Luxembourg
Foreword
HistoriceconomicuncertaintiesunderscorethechallengesLuxembourgCFOsface:indevelopingtheirbudgetsandforecasts,weighingsignificantlydynamicexternalandinternalfactorswhilestrivingtostreamlineprocessesandproperlyaligninganapproachforgrowth.
Seniormanagementrequirearefinedinformationflow,whichnotonlyproperlybalancesthevarietyofinternalandexternalindicatorsforplanningpurposesbutalsoenablesimprovedorganisationalfocus,coordinationandaccuracy.
Inthiscontext,wehaveconductedtheCFOBudgetingSurvey2012oftheLuxembourgmarket.Wehavefocussedonorganisationalpriorities,currentbudgetingandforecastingprocessesaswellasrelatedcontrolsandaccuracy.Thissurveycomplementsour2011CFOReportingSurvey,whichfocussedontheclosingandreportingprocessesofLuxembourgcompanies.Wecontinuetoexplorehowseniorfinanceexecutivesadapttheirmanagement,planning,reportingandassessmenttoeffectivelycompeteindifficultmarketconditions.
WehavefoundthatthereareclearstatementsofpreferenceamongstallCFOs,withsomestrikingdifferencesbetweenthoseinthefinancialsectorandthoseinthenon-financialsector.Importantly,weseethat:• ExternalbusinesseventsareofconsiderableconcerntoalargemajorityofCFOsandthiscompoundsthesentimentthattheymusthavemoreresponsivefinancialprocesses–especiallyfocussedonimprovingbusinessanalysis,cashandcostmanagement,withriskmanagementofparticularconcerntotheFSsector;
• CFOsrequireadditionaldetailonprojectsandbusinessinitiatives;withCFOsidentifyingcashflow,directcostsandworkforcecostsasareaswhereinformationcanbeimproved;
• Whiledecisionmakingislargelyinclusive,asubstantialnumberofrespondentsareconservativeintheirforecastsandunderestimatingbusinessperformance;
• ForecastingaccuracyneedsimprovementanditappearsclearthatthemajorityofCFOsinoursurveyarerespondingbydecidingonrollingforecastingastheirpreferredmethodtocomplementtheirbudgetprocess.Indeed,inseveralaspectstherollingforecastgroupoutperformsthenon-rollingforecastrespondentsforbothfinancialandnon-financialservicecompanies.
Wetrustyouwillfindthisstudyinterestinganduseful.ShouldyoubeinterestedtodiscussPwCserviceofferinginthatarea,donothesitatetocontactus.
François Génaux, Partner AdvisoryMarketandFinancialServicesLeader
Introduction
ThissurveyisrepresentativeoftheLuxembourgcorporateenvironmentandthereforefinancialservicecompaniesfeatureamongsttherespondentsincludingbanks,assetmanagementcompaniesandinsuranceproviders.Inaddition,respondentsincludeindustriesandservicesreferredtoasnon-financialcompanies.
Inbothlocalandinternationalcompanies,thefinancefunctionisresponsibleforguidingthebusinesswithtimelyandaccurateplanning,regardlessofthedifficultiesindevelopingtherequiredinformation.Toillustratethevarietyofapproaches,wepresenttheresponseswithrespecttothetypeofbusiness.Resultsincludethoseforallrespondents,withthefinancialsectorresultsarereferredtoas‘FS’andthenon-financialsectorresponsesarelistedtoas‘NFS’.
CFO Budgeting Survey 3
4 PwC Luxembourg
Uncertainty. Pressure on costs. Volatility. These are the challenges of today’s business environment and in times like these, the importance of being able to understand and respond to change is critical.
Financial management priorities
Allfinancialmanagersfacethechallengeofbalancingneedsfrombothinternalandexternalstakeholders.Inthisclimateofincreasingeconomicuncertainty,the“domorewithless”mandate,combinedwithcompetitivepressure,meansthatcompaniesneedtoaccomplishmore,withfewerresources,andlessroomforerror.
Betterprocessesandtechnologysystemsforfinancialplanningcandomorethanonlyhelpdecisionmakersrespondtochangingbusinessconditionsmoreeffectively.Theseimprovementscanalsoallowlinemanagerstofocusonsomeofthehighest-valueactivitiesintheenterprise:producinggoodsanddeliveringservicesefficiently,developingnewbusiness,andmeetingcustomerrequirementsbyofferingthemaclearerviewofthefactorsinvolvedinthedecision-makingoflaunchingproductsandservices.
Theabilitytoforecastandplanforthefutureisacriticaldimension
ofcompanies’effortstomeetdemandandservecustomers,whilemaintaininghard-wonoperatingefficiencies.Surveyresultsconfirmthatfinanceexecutivesareturningtheirattentiontotheseandotherperformance-managementactivities.Whenweaskedfinanceexecutivestoconsidertheirimprovementprioritiesinfinanceforthenexttwoyears,surveyrespondentsmostoftenpredictedthatDecisionSupport(82%)andInternalReporting(77%)wouldbecomehigherprioritiesforimprovement(combining‘muchmore’and‘slightlymore’important).Theseperformance-managementactivitiesmanagedtoedgeoutCostManagement(76%)andRiskManagement(76%)-evenassurveyresultsamplyreinforcedtheimportanceofWorkingCapitalManagementtorespondents(71%).Noticeably,companiesinthefinancialservicessectoraremarkedlymoreinterestedinimprovingtheirriskmanagementthanthoseinnon-financialservices,95%to46%respectively.(SeeFigure1)
CFO Budgeting Survey 5
Figure 1: In your opinion, to what extent is your company’s interest in improving the following finance activities likely to change over the next two years, compared to today?
Aseconomicconditionsslowlyease,companiesareworkingtomaptheirpathtogrowthamidspecificindustryandcompanylevelcircumstances.Factorssuchasburgeoningregulationandmoreintenseinvestorscrutinyareshapingindustrydynamics,creatingnewopportunitiesforgrowth-andintroducingnewrisksto
performance.Improvingprocessesandsystemsforfinancialplanning,CFOshavestated,canhelpcompaniesmakethemostoftheseopportunities,whileminimisingtheiraccompanyingrisks.
Decision Support
Decision Support
Internal Reporting
Internal Reporting
Cost Management
Cost Management
Risk Management
Risk Management
Working Capital
Working Capital
Planning, Budgeting
Planning, Budgeting
External Reporting
External Reporting
Regulatory Compliance
Regulatory Compliance
Transaction
Transaction
41%
29%
35%
35%
40%
17%
12%
24%
20% 51%
32%
29%
9%35%
29% 53%
48%
41%
41%
31%
54% 29%
20%
24%
24%
26%
41% 15% 3%3%
3%3% 3%
AllRespondents
NFS FS
Much higher
Slightly higher
No change
Slightly lower
Much lower
40% 42% 42% 11% 5%
5%
5%
5%
5%
21%
21%
26%
31%
42%
16%
11% 11%
40%
38%
46%
34%
31%
56%
13%
38%
13%67%
43%
67%
25%
7%
7%
25%
53%
27%
19%
20%
43% 16% 58%
37%
42%
42%
63%
47%
53%
32%
27% 42%
13% 53%
44% 37%
19% 16%
19% 21%
13% 11%
13% 31%
6 PwC Luxembourg
Time-consuming, inflexible processes
Key challenges and trends in financial planning
InourinteractionwithCFOs,werecognisethemultiplechallengesthattheyfaceindealingwithcompetingandoftenconflictingpriorities.Today,CFOsandfinanceorganisationsarenotonlytaskedwithenhancingperformanceinsightsbutalsomaintainingcontrolanddeliveringservicesmoreefficiently.
Thefinanceexecutiveswhoparticipatedinthisstudyrecognisethatoverhaulingprocessesandtechnologyforfinancialplanningisamajorchallenge.Theseimprovementsdemandnotjustasubstantialcommitmentoftimeand
resources,butacarefulconsiderationofcompanyorganisationandculture.Ourresearchshowsthatmanyfinanceexecutives-convincedofthebenefitsthatwillflowfromchangearechampioningfinancialplanningimprovementattheircompanies.Inthissection,weexaminethecurrentstateoffinancialplanningandcapturewhattheyaredoingnowtoimprovetheircapabilitiestomanagefutureperformance.
Althoughthetimeittakestofinaliseabudgetorprepareaforecastnaturallyvariesfromindustrytoindustryandcompanytocompany,mostofourrespondentsagreedthattheircompaniesarespendingagreatdealoftimeandeffortonconsolidating,summarising,communicating,explaining,andreviewinginformationforfinancialplanning.Oneunfortunateconsequenceoftheselengthyplanningcyclesisthatfinalbudgetscanfalloutofstepwithquicklyevolvingbusinessconditions.
Importantly,financeorganisationsthathavesuccessfullyrevampedtheirplanningprocessescantodaycompleteaforecastanddevelopanannualbudgetquickly.Theseorganisationshavereducedthetimespentonlowervalueplanningactivitiesandbenefitedfromhavingprospectiveinformationandplansavailableearlierinthecycletoimpactbusinessperformance.
Companiesrelyonforecastingprocessestohelpthemadjusttheirfinancialplansastheyearproceeds(withvaryingresults).Themajorityoffinanceexecutivesreadilyagreethatthetimeandeffortspentonthemostmechanicaltasksassociatedwithbudgetingandforecasting-taskslikedata-gathering,reconciliation,andconsolidation-wouldbebetterinvestedinmorevaluableactivities.
Weaskedsurveyrespondentstoidentifykeyfinancial-planningactivitiesthatareabsorbingtheirresources.Asubstantialnumberofrespondents(over50%)reportedthattheircompaniesspendanoverwhelmingamountoftimeandeffortonnearlyalloftheactivitieslisted-fromReviewingtheBudget,toAnalysis,toDevelopingTargetsandPreparingReports.However,GainingConsensuswasnotoneofthemostdemandingactivitiesinfinancialplanning. (SeeFigure2)
Leadingcompanieshavefocusedattentiononsimplifyingtheoverallfinancialplanningprocessandautomatingofflineandlowvalue-addedbudgetingandforecastingactivities.Wehaveseencompaniesimplementfocussedprogrammesaimedatreducingplanningiterationsandcycletime,automatingdatasourcesandreportpreparationaswellasreducinglevelsofreviewandapproval.Theseprogrammeshaveallowedbusinessandcorporatefinancialplanninganalyststomoveawayfromthebudgetgenerationfocus,enablingthemtofreeuptimetoanalysetrendsanddevelopmeaningfulbusinessinsights.
CFO Budgeting Survey 7
Figure 2: In general, how much time and effort does your company currently spend on the following activities when preparing its budget?
Figure 3: Budgeting and forecasting are time consuming at a majority of companiesOurcurrentsurveyresultsfurtherconfirmthatfinancialplanningactivitiesarecomplex,iterative,andtime-consumingatmanycompanies.Nearlyhalfofallrespondents(46%)reportedthatbudgetingtakestwomonthsorlongertocompleteattheircompanies.Meanwhile,morethanhalfofallrespondents(53%)reportedthatittakesfivebusinessdaysorlongertoproduceaforecast,andnearlyone-quarter(24%)saidthatittakesmorethan10businessdaysfortheircompaniestogenerateaforecast.Whilethemajorityofnon-financialservicecompaniesareabletocompletetheirbudgetingmorequicklythanthemajorityoffinancialservicecompanies(60%forNFSintwomonthsorless,withonly50%forFS),theoppositeistruewhenitcomestoforecasting(60%forlessthan5daysforFS,withonly29%forNFS).(SeeFigure3)
54%
47%
60%
29%
40%
43%
0%
21%
50%
7%
45%
60%
5%
20%
15%
5%
43%
29%
All Respondents
Preparing Reports
Analysing Information
Developing Targets
Collecting, Consolidating
Reviewing the Budget
Gaining Consensus
All Respondents
NFS
NFS
FS
FS
3%
18%
6%
< 2 months
2-4 months
4-6 months
< 5 days
5-10 days
11-20 days
> 20 days
56% 38% 6%
6%
6%
3%
55% 36%9%
56% 38%
59% 26%
56% 35%
29% 59%
12%
9%
6%
Great deal of time and effort
Signifiant time
Some time and effort
No time or effort
8 PwC Luxembourg
Seeking the right level of detail
PwC ViewThelevelofdetailintheplanningprocessshouldbedefinedadequatelytoenablemanagersandplannerstofocusonthekeydriversofthebusiness.Althoughplannersandmanagersmayneedtodrilldownonactualresultsinordertoexplainvariances,financeteamsbenefitfromfocussingoncontrollabledrivers,ratherthandetailedaccountstodriveoverallforecastandplanaccuracy.Whilehundredsofplanningaccountsandsubstantialdetailcanprovidealevelofreviewandinsightintoaplanner’sthinking,itdoesnotnecessarilycorrelateintoimprovedforecastorplanaccuracy.
Thekeyfindingsthatwehavefoundinourexperiencewithplanningandforecastingwithmanyaccountsandgreatdetailislongertimelines,morecomplexprocesses.Improvedgranularityisthebasisofenhancedcomparisonandofforecastswithactuals.Wealsoobservethatleadingfinanceorganisationsdevelopplansandforecastsatamaximumof50accountlines,majorproductgroupsorfamilies,andatanentitylevelthatisconsistentwiththeiraccountabilitystructure.
Obtainingtherightlevelofdetailforanorganisationmeansthatacompanyhastounderstandandfocusontherealdriversofthebusinessthatsignificantlyimpacttheirfinancialstatementsandspendlesstimemanagingdetailedaccountsandproductsthathavelittleimpact.
Developingthebalancedlevelofdetailinacompany’splanningenvironmenttranslatesintothefollowingbenefits:
Avoids giving the wrong perception of accurate planning and forecasting: Acompanymayhaveaverycomplexanddetailedplanningmodelwhichisnotnecessarilythatitismorepreciseorthatdevelopsabetterprojectionthanasimplermodel.Detailedplansandmodelswithelaboratecalculationscanlureplannersandmanagersintothetrapofthinkingthataplanorforecastismoreaccuratesimplybecauseamodelperformsmorecalculationsorcalculatesmoreaccountsandproducts.
Allows financial planners to focus on the most important accounts: Manytimesweseeelaboratemodelsandcalculationssupportingaccountswithsmallbalancesthatarenotsignificanttotheoverallfinancialplan.
Allows scenario analysis and “what-if” challenges: Bymovingtheorganisationtoahigherlevelofdetailintheforecastandplan,thefinancecommunitywillnowpotentiallyhavetimetorunadditionalversionsoftheforecastorplantounderstandtheearningsimpactunderdifferentassumptions.Thisnowmovesfinancefromaroleofplandevelopertoonethatcanhelpmakesolidrecommendationstoitsbusinesspartners.
Manyofthefinanceexecutiveswhoparticipatedinthisstudysaidtheircompaniesareworkinghardtostriketherightbalancebetweentoomuchandnotenoughgranularityinthereportinganddeliverablesassociatedwithfinancialplanning–includingacomparisonwiththeneedsforactuals.Oneofthemostdifficulttasksingettingtotherightlevelofdetailisreconcilingtheinformationneedsofvariouscompanyelements.Itissometimesdifficulttobalancethevaryinginformationneeds,fromfinanceandcorporatemanagementinonegroup,tooperationsintheother.ThisisadailyeffortforCFOsandtheircolleaguesinmanagement.
CFO Budgeting Survey 9
Thesurveyresultssuggestthat,broadlyspeaking,betweenone-quarterandone-thirdoffinanceexecutivesaspiretoincreasethelevelofdetailintheirforecaststogainamoregranularviewintothefuturewhilerecognisingthatadditionaldetailmayincreaseforecasttimelinesandprovideadditionalchallenges.ThereisacleardifferenceofpreferenceamongstFSandNFSindesiredgranularityforCapitalCosts.
Only16%ofFScompaniesseektoincreasetheirdetailwhile43%ofNFScompanieslookforgreatergranularity.(SeeFigure4)
Intheend,findingtherightlevelofdetailinvolvestailoringdeliverablestofittherequirementsandobjectivesofthetaskathand-andoftheneedsofindividualusers.Thefundamentalserviceorientationofthefinancefunction,
accordingtorespondents,shouldleadfinancetoweighcarefullytheburdenthatitsrequestsfordetailedinformationcanplaceonbusinesslines.Thisinturnfacilitatesacomparisonofforecastsandactuals.
Figure 4: In your opinion, would your company benefit most from: increasing the detail of its forecasts in each of the following areas (to gain a more granular view into the future), or decreasing forecast detail (to focus on the most critical factors)?
Capital Costs
Direct Costs
Workforce Costs
Working Capital
Cash Flow
Revenue
Projects
Capital Costs
Direct Costs
Workforce Costs
Working Capital
Cash Flow
Revenue
Projects
27% 58% 15%
3%3%
3%
3%3%
27% 67%
31% 63%
24% 61%
35% 53%
24% 76%
50% 50%
12%
12%
AllRespondents
NFS FS
Increased
Neither
Decreased
Not sure
43%43%14%
7%
7% 7%
8%
16% 68% 16%
16%
21%
5%5%
74%
68%
68%
53%
84%
53%
36%57%
54%
53%
53%
67%
46%
21%
38% 27%
33% 16%
47% 26%
33% 16%
54% 47%
10 PwC Luxembourg
A tendency toward conservatism
Apersistentissueinfinancialplanningisthechallengeofestablishingarealisticviewoffutureperformancewhileencouragingappropriaterisk-taking.Business-linemanagersareclosetoemergingtrendsandprovidemuchoftheinternaldatathatinfluencesthefinancialplanningprocesses.Atthesametime,managersaresometimesmoreconservativeintheiroutlookthanbusinessconditionswarrant.Whilethiscanbeseenasariskmanagementresponsetoglobaleconomicuncertainty;itistroublingbecause,overtime,overlyconservativefinancialplanscanleadcompaniestomissopportunitiesand,ultimately,tounderperform.
Whenweaskedsurveyparticipantswheretheircompanies’budgetsdidwell-andwheretheycouldbeimproved-financeexecutivesweremostlikelytosaythattheirbudgetseffectivelysetoutaclearframeworkfortheanalysisofactualresults(19%ofrespondentsreported“excellentperformance”).Butfinanceexecutivesoftenreportedthattheirbudgetswerelesseffectiveatmotivatingmanagerstotakeappropriateriskstogrowthebusiness(13%reportas“low”and59%as“average”inassessingtheirperformance).FScompaniesratedthemselvesmorehighlyintheirabilitytoallocateresources(47%‘Strong’comparedto23%forNFS)andsettingBusinessChecks(67%either
‘Strong’or‘Excellent’FSv44%forNFS).(SeeFigure5)
Manycompaniesthatrelyonforecaststorefreshfinancialplansandadjusttheirobjectivesthroughouttheyeararefindingthattheirforecaststendtobeconservative,too.Forecastsareexpectedtovarycomparedtoactualresults-“thequestionisbyhowmuch,”onefinanceexecutivetoldus.Overtime,however,acompany’sforecastsideallyshouldfallwithinareasonablycircumscribedrange.
Figure 5: The following items are commonly cited benefits of budgeting. In your opinion, what do your company’s budgets do well? Where could they improve?
Motivating Managers
Motivating Managers
Allocating Ressources
Allocating Ressources
Day-To-Day
Day-To-Day
Business Check
Business Check
Performance Targets
Performance Targets
Clear Framework
Clear Framework
28%
38% 21%
47%
44%
50%
47%
61%
39%
28%
47%
22%
11%
6%
42%
63% 16%
11%
6%
6%
16%
17%
23%
46%
46%
23%54%15%
54%
38%
38%
69%8%
8% 54%
16%
8%
8%
38%
8%
8%
59% 13%
9%
10%
3%
3%
6%
38% 53%
45% 39%
24% 61%
13% 32%45%
47% 50%
19% 59%
10%
19%
AllRespondents
NFS FS
Increased
Neither
Decreased
Not sure
CFO Budgeting Survey 11
ItcomesasnosurprisethatCEOsandCFOsaredemanding“reality”fromthefinancialplanningprocess.Budgetingandforecastingarekeypillarsofanenterpriseperformancemanagementsystemandgettingrealisticandaccurateplanninginformationiscriticalforexecutivestoquicklyadapttochangingbusinessconditionsandmaintainconfidenceofexternalstakeholders.
Conservative
Neither
Optimistic
PwC view:Fromourexperience,weobservethatastherearemoreorganisationalreviewlayers,thereisagreaterlevelofconservatism,addedateachorganisationallayer.
Are your forecasts Conservative or Optimistic?
Figure 6: In general, approximately how close to actual performance have your forecasts proven to be over the past three years?
Forecasting accuracy over the past three years
42%
44%38%
16 %
12 %24 %
42 %
44 %38 %
Surveyresultssuggestthatforecastsarefallingshortofactualresultsatmanycompanies.Morethanhalfofallrespondents(58%)reportedthattheircompanies’actualperformancehasgenerallyvariedatleast6%comparedtoforecastsoverthepastthreeyears.Indeed,35%ofrespondentsreportedthatactualshavegenerallyvariedmorethan11%comparedtoforecasts.Forty-twopercentofrespondentssaidtheirforecastshavetendedtobeevenlydistributedbetweenconservatismandoptimism.Similarly,42%ofrespondentsreportedthattheirforecastshavetendedtobeconservativeovertheprecedingthreeyearperiod-whileonly16%confirmedthattheirforecastshavetendedtobeoptimistic.
Non-financialservicecompaniesresponsesshowthattheyhavebeenmoreaccurateinforecastingaccuracyoverthepastthreeyears,with46%abletostaywithin5%error,whileonly39%ofFScompaniesmanagedthis.Noticeablymorenon-financialservicecompaniesseetheirforecastsasoptimistic,with24%,comparedtoonly12%fortheFSsector.(SeeFigure6)
3-5%
6-10%
11-20%
42%
46% 39%28 %
35 %
33 %
23 %
8 %
46 %
All
NFS FS
All
NFS FS
Weoftenobservethatmanagementviewsthebudgetingprocessasacontrolmechanismtoachieveatargetandculturallystarttothinkwithinitsboundaries.Thismindsetkeepsan
organisationfocussedinwardsandlimitsthevalueitcanprovidetomanageabusinesswhichnaturallyisexternallyfocused.
12 PwC Luxembourg
Boosting forecast accuracy
Weaskedfinanceexecutivestotelluswhichfactorsaremostlikelytoleadtovariancesbetweenforecastsandactualperformanceoftheircompanies.Morethanhalfofallrespondents(68%)confirmedthatuncertaintyinthebusinessenvironmentleadstovariances.
Thepointofforecasting,however,istogaininsightintothefuturedespiteuncertainty.Soitisperhapsmoretroublingthatsurveyrespondentsalsofrequentlyreportthatforecastvariancesresultedfromdifficultyforecastingoverlong-timehorizons(48%),andfromdifficultyinaccessingandincorporatingexternalinformation(32%).ForecastingoverthelongtermwassignificantlymorerelevantforNFScompanies(62%)ratherthanthoseinFS(39%).(SeeFigure7)
Figure 7: In your opinion, which of the following factors are most likely to lead to variances between forecasts and actual performance at your company
Uncertainty in the external business
environment
Forecasting over long time horizons
Dufficulty in accessing and incorporation
external information
Confusion between forecast and targets
Difficulty in assessingrisk to forecast
Forecasting in too much details
Unreliable financial data
Unreliable non-financial data
Other
68 %
48 %
32 %
29 %
16 %
6 %
10 %
6 %
10 %
77 %
62 %
31 %
23 %
15 %
8 %
23 %
8 %
61 %
39 %
33 %
33 %
17 %
6 %
6 %
17 %
All respondents
NFS
FS
CFO Budgeting Survey 13
Leadingfinanceorganisationsareaddressingthechallengeofconservatisminforecastingbyculturallyshiftingthefocusoftheforecastingexerciseawayfromcontroltohoweffectivelythebusinessexploitsnewopportunitiesandhowsuccessfultheyareingainingmarketsharefromthecompetition.Thefocushereisnotiftheorganisationbeatthebudget;instead,thefocusisonwinninginthemarketplace.
Financecanhelpdrivethischangebyfocusinglessonlookingforholesintheforecastandcomparingitwithbudgetandmoreonupfrontcollaborationwiththebusinessunitstoproactivelyidentifynew
opportunities,appropriaterisks,andtoincorporatethoseopportunitiesandrisksintheforecastprocessonacontinuousbasisincomparisontoactuals.
Theexternalsourcesofdata-includingmacro-economicindicators,industryreports,andcompetitivebenchmarks-canprovideausefulperspectiveoninternalperformanceprojections.Additionally,discussingwhyinternal/externalindicatorsconflictcanbearewardingexperienceinbringingtogetherplanningteams.Exploringthesequestionsandcontradictions,however,hasoftenprovedtobeavaluableexercise.
In the difficulty of forecasting, there is “little integration of operational and financial data – and understanding of interactions between both.”HeadofGroupFinanceforalargefinancialservicesgroup
PwC view:Itisnotsurprisingtohearthatuncertainandchangingbusinessconditionsarecontributingtoforecastingvariancesversusactualresults.However,theleadersinthisenvironmenthaveconsistentlyshownadisciplinedforecastingprocessthattacklesuncertaintybyincreasingattentiontoexternalinfluencesandkeybusinessdrivers.
14 PwC Luxembourg
A blend of top-down and bottom-up
approaches
Somefinanceexecutiveshaveindicatedthatoldertechnologyplatformsoftencan’taccommodatetheannotationsandanalyticsthatcontributetomoreaccurate,risk-sensitiveforecasting.
Whichapproachtofinancialplanningyieldsgreatervalue:atop-downapproach?Oronethatproceedsfromthebottomup?Participantsinthisstudypointedoutthateachapproachhasitsadvantages.Ontheonehand,atop-downapproachcanhelpmitigateconservatismandencouragemanagerstostretchtheirdivisionstobetterperformance,respondentssaid.Ontheotherhand,themostreliableinformationoncriticalbusinesstrendstendstobubbleupfromthebottomandfactoringintheincreasedsenseofparticipationabottom-upprocesscangivetothoseinvolved.Inpractice,manycompaniesseektogainthebestofeachapproachbyemployingacombinationofthe two.
Somefinanceexecutiveshaveindicatedthatoldertechnologyplatformsoftencan’taccommodatetheannotationsandanalyticsthatcontributetomoreaccurate,risk-sensitiveforecasting.
Whichapproachtofinancialplanningyieldsgreatervalue:atop-downapproach?Oronethatproceedsfromthebottomup?Participantsinthisstudypointedoutthateachapproachhasitsadvantages.Ontheonehand,atop-downapproachcanhelpmitigate
conservatismandencouragemanagerstostretchtheirdivisionstobetterperformance,respondentssaid.Ontheotherhand,themostreliableinformationoncriticalbusinesstrendstendstobubbleupfromthebottomandfactoringintheincreasedsenseofparticipationabottom-upprocesscangivetothoseinvolved.Inpractice,manycompaniesseektogainthebestofeachapproachbyemployingacombinationofthetwo.
PwC view:Ourhands-onexperienceincollaboratingwithclientstoanalysevariousbudgetingapproachessuggeststhatabalancedapproachincorporatingbothtop-downandbottom-upinputsistheoptimalpath.Itencouragesupfronttargetdiscussionsandnegotiationswhichstreamlinethenumberofplanningiterationsandchangesonthebackend.Leadingcompaniesthatutilisea12-monthrollingforecastprocessfrequentlyprovidetopmanagementtheinitialviewofnextyear’splanstohelpsetinitialtargets.
Figure 8: In your opinion, which of the following statements best describes the current budgeting process at your company?
46%
62%
33%
28%
16 %3 %6 %
29 %
38 % 22 %
All
NFS FS
6 %
11 %
Activity Based
Bottum-up
Top-down
Zero based
O ther
CFO Budgeting Survey 15
Wehaveconsistentlyobservedthatleadingfinanceorganisationshaveamindsetofcontinuousforecasting.However,thebusiness-unitupdatetocorporateremainsamonthly/quarterlyprocess,basedon
corporaterequirements.Oneofthekeylessonsthatfinanceorganisationshavelearnedisthatincreasingforecastingfrequencyisdesirable.
Basedontheresponsestothissurvey,wedonotseeadirectlinkbetweenthebudgetingmethodology(topdown,bottomup)andaccuracyortimetocreateabudget.Otherfactors
seemtosignificantlyinfluencethesemeasurements,includingsizeofthecompany,itsinternalprocessesanditsglobalcomplexity.
Figure 9: In your opinion, which of the following statements best describes the current budgeting process at your company?
6%
32%
62 %
All
15%
31%
54 %
NFS
33%67 %
FS
“Bottom up at the beginning, and then targets are set by the Group, so the approach becomes top down.”VPofafinancialserviceprovider
Finance only
Finance + Top Management
Finance + Top Management + Operating Management
16 PwC Luxembourg
Rolling forecasting as the emerging standard
Whileitisnotablethatamajority-58%-ofrespondentstooursurveysaytheyhavealreadyadoptedrollingforecasting,itmaybeevenmorenotablethatanother13%ofrespondentssaytheyplantotransitiontorollingforecasts.Only29%ofrespondentssaytheyhavenotadoptedrollingforecastsandareunlikelytodosointheforeseeablefuture.FScompaniesseemmorecomfortablewithRollingForecasting(61%)thanNFS(54%),though23%ofNFScompaniesplantoadoptitcomparedtoonly6%ofFScompanies.(SeeFigure10)
Inthesurvey,financesectorcompaniesthathaveadoptedrolling-forecasting,showedclearadvantagesinbeingabletoproducebudgetsandforecastswithgreateraccuracy.Further,respondentsdescribedavarietyofhybridapproachestobudgetingthatclearlyaimtoreapthebenefitsofbothtop-downandbottom-upapproachestofinancialplanning.
Someofthefinanceexecutiveswespokewithacknowledgedthatmorefrequentforecastingcanyieldabetterviewintoswiftlyemergingtrends.Butmovingtomorefrequentforecasting,theysaid,poseschallenges-notleastofwhichisidentifyingtherightlevelofdetailforthoseforecasts.Implementingmorefrequentforecastingcancreateunnecessaryburdensinfinanceandinthebusinessunlesscompaniestakecompensatorymeasures:automatingprocesses,reducingtheamountofforecastdetail,orsomecombinationofboth.
Figure 10: Has your company adopted rolling forecasting?
58%
54% 61%
29 %
23 %
13 %
23 % 6 %
All
NFS FS33 %
Yes
No, but we plan to do so
No plans
CFO Budgeting Survey 17
Technology, process, and organisational improvements
Theresultsofoursurveyconfirmthatfinanceexecutiveshavewhollyembracedthe“people,processes,andsystems”paradigm:theideathattechnology,processes,andorganisationareeachimportantandcomplementarydimensionsofimprovement.Morethan40%ofrespondentssaidtheircompaniesare“very
likely”topursueimprovementsintheirfinancial-planningtechnology,processes,andorganisationandgovernance.Asolidmajorityofrespondents(77%)saidtheircompaniesareatleast“somewhatlikely”or“verylikely”topursueimprovementsineachoftheseareas.
FinancialPlanningimprovementsare‘AlreadyinPlace’for17%ofNFScompanies,only11%forFS,withanother58%ofNFS‘Verylikely’toimplementplansoverthenexttwoyearsincontrastto50%fortheFSsector.(SeeFigure11)
Figure 11: In your opinion, how likely is your company to pursue improvement in the following areas over the next two years, as it works to improve its financial planning (including both budgeting and forecasting)?
Organisational
Organisational
Financial plainning
Financial plainning
Technology Systems
Technology Systems
10%
17% 6%
13%
17% 11%
10%
17% 6%
44%
33%17% 50%
54%
17%8% 50%
60%
17%8% 60%
33%
33% 33%
23%
58% 28%
23%
58% 28%
13%
13% 11%
10%
10% 11%
7%
7% 6%
AllRespondents
Already in Place
Very likely
Somewhat likely
Not likely
PwC view:BasedonPwC’sexperience,allthreeareas-people,process,andtechnology-mustbeconsideredwhenlookingtoimproveanorganisation’sfinancialplanningandforecastingactivities.Simplystated,organisationsshouldbestructuredtosupportrationalisedfinancialprocesses,andtechnologyshouldbeviewedasanenabler.Ifallthreearenotaligned,improvementinonlyoneareaoftenwillnotyieldsustainableresults.Whiletakingsomeofthedetailoutofforecastscanhelpmakefrequentupdatesalessintensiveeffort,adjustingtohigh-levelreportingcanitselfbeanadjustment.Thereneedstobeawellthoughtoutprocesswhichencouragesthoseinvolvedtoparticipate,shareandlearntoadapttochangingrequirements.Resistanceshouldbeexpectedandwellreasonedandpreparedchangemanagementcanplayasignificantroleinconvincingunwillingparticipants.
NFS FS
18 PwC Luxembourg
Whilefewtechnology-improvementeffortsaresuccessfulwithoutattentiontobothprocessandorganisationalfactors,it’salsotruethatfinancial-planningchangeefforts,inparticular,oftenrequiretechnologyimprovements.However,nearlythree-quartersofrespondentstooursurvey(73%)saidtheircompaniesareusingspreadsheetsandmanualprocesses-notERP,custom-builtapplications,orbest-of-breedsystems-forfinancialplanning.
Perhapsunsurprisingly,theFSsectorismorediverseinitsITsystemsusedinforecastingwithallfourpossibilitiesselectedbyFSrespondentswhilenoneofthenon-FSparticipantsusecustombuiltsystems.(SeeFigure12)
Figure 12: Which of the following statements best describes your company’s IT systems for financial planning, including budgeting and forecasting?
7%
10%
10%
73 %
All
NFS FS
18%
18%
64 % 11%
6%
6%
77 %
Custom
Best of Breed
ERP
Spreadsheets
PwC view:Acommonmisconceptionisthatallspreadsheetswillbeeliminatedthroughtheimplementationof“best-of-breed”technology.Thefactisthatmanybest-of-breedplanningsolutionsintegratefullywithspreadsheetprogrammesandthegoalthroughimplementationistoreducespreadsheetreliance,notfullyeliminateit.
CFO Budgeting Survey 19
Cross-functional collaboration
KPIs as important indicators of finance measurement priorities
Thepathtofinancial-planningimprovement,ourrespondentssaid,startswithstrongleadershipfromthetop-andcontinueswiththeclose,cross-functionalpartnershipsthatarisewhenbusinessconstituentscometogethertoworkforchange.
ITandfinanceleadershipprovidetheinitialimpetusforchangeandthereneedstobeaclearlydefinedrationaletomotivateeveryoneandgainorganisationalmomentum.
Thefinancefunction,alongwithseniormanagement,useKeyPerformanceIndicators(KPIs)aschecksonaligningoperationstostrategy,improvingefficiencylevelsaswellasmotivatingmanagerstoachievecertaingoals–andbecompensatedforsuchaccomplishments.Itisthereforeallthemoresurprising,thatwhilethemajorityofrespondentscomparetheiractualtobudgetedfiguresonamonthlybasis,therearethreeKPIswhichareperformedonlyondemandorneverbyasignificantportionofrespondentsinboththefinancialandnon-financialsectors.ThemonitoringofKPIsvariessubstantiallyfromonesectortoanother,andevenwithinsectorsbasedoncompanysizeandotherconsiderations.
ResponsesforallrespondentsrevealedthatthefollowingKPIsareusedasfollows:
• Cashflow:20%eitherNevercompareorOnDemand;
• CapitalCostsandRequirements:31%eitherNeverorOnDemand;and
• Projects/BusinessInitiatives:26%eitherNeverorOnDemand.
Indeed,adeeperanalysisrevealsthatevenamongstFinancesectorcompanies,28%donotrunCashFlowchecksunlessrequiredornever.Thisisespeciallystrikinggiventhecurrenteconomicclimateandinlightoffinancialpressureonliquidityandcapitalrequirements.
ConclusionImprovingfinancialplanningbringslong-termbenefits
Thebudgeting,planning,andforecastingprocessatmostorganisationsisanexpensiveandtime-consumingactivitythathasoftenfailedtofullydeliveritsintendedvalue.HavingmorereliableandtimelyviewsoffuturefinancialperformancecontinuestobeatthetopoftheimprovementagendaformanyCFOs.Transformingthefinancialplanningprocessrequiresstrongleadershipandtheabilitytohavefinanceandotherdepartmentsworktogethertoofferrealisticviewsofthefuture.Throughcollaboration,ahigherlevelofplanningdetailutilisingbusinessdrivers,reducedplanningcycletimesandsystemautomation,companiesarebeginningtoreapthetruebenefitsofintegratedfinancialplanning.
Manyoftheexecutiveswecontactedduringthissurveyconfirmedthatfinancialplanningattheircompaniescouldbeimprovedthroughbetterintegrationofexternalbusinessinfluencesandgreaterinsightintolongertermplanningtechniques.Limitedresourcesandcompetingprioritiesrestrictthefinancefunction’sabilitytoactinallareassimultaneously–andtakeintoconsiderationtheeconomicuncertaintycompaniesfaceduetoincreasedregulationandcapital.
Forthosecompanieskeentopressaheadandadoptmajorfinancialplanningimprovements,especiallythroughimplementationofrollingforecasting,thereisrecognitionthatchangerequires
time,effortandresources.Intheshorttomid-term,therearebenefitsinaligningthefinancialandstrategicobjectivesofcompaniesincludinggreatercross-functionalunderstandingandcollaboration.
20 PwC Luxembourg
CFO Budgeting Survey 21
Contacts
François Génaux
AdvisoryMarketandFinancialServicesLeader
Tel:+3524948482509
[email protected] Gateau
FinanceFunctionEffectivenessLeader
Tel:+3524948482151
Serge Bertoldo
ITconsultingLeader
Tel:+3524948485722
22 PwC Luxembourg
PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with more than 2,100 people employed from 57 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach.
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