Until someone figures out how to perfect time travel or the crystal ball, finance managers will have to cope with uncertainty in their budgeting and planning process. From spiking fuel prices to natural disasters, external factors can cause unexpected shortfalls in an organization's operating income that send shock waves through the budget and spur finance to quickly adjust forecasts and reprioritize program expenditures based on available dollars.
Riding out this tumult requires managers to gather and consolidate up-to-date financial and nonfinancial data. It also demands that they see the conditions influencing the numbers, communicate the latest findings across department boundaries, and effectively shift course in response to environmental changes.
These demands can be tough to handle for organizations that primarily roll up budgets and forecasts by hand in spreadsheets or through nonintegrated reporting tools. They're particularly frustrating for businesses that are under constant pressure to reduce overhead costs in order to remain competitive and for nonprofits, which are perpetually urged to devote higher percentages of every donation toward helping their communities. Both types of organizations are finding relief from the turbulence in business performance management (BPM) software that supports more flexible forecasting.
Budget Agility Requires Financial Visibility
To stay agile amid constant change, companies must clearly see the assumptions underlying the overall budget numbers, assumptions such as how projected revenue levels or donations compare with historical figures. That level of visibility is extremely difficult to achieve through spreadsheet-based budgets. Plus, when managers manually compile the numbers, the budget typically provides no insight, through the course of the year, into whether the original plans remain valid in light of actual performance. Revising forecasts at a program level to reflect differences in actual versus projected contributions is painfully complex with spreadsheets.
A natural disaster can bring this limitation into sharp focus. The American Red Cross received more than $1.67 billion from September to December 2005 for assistance of the victims of Hurricane Katrina. Much of the money was contributed through local American Red Cross chapters around the country. The chapters were obligated to pass 100 percent of those funds on to the national organization, yet managing the donations required a fair amount of local resources. "It's a service that we happily provide, but many people don't realize that some of the associated costs come out of our local budget," says Rick Hankins, director of administrative services and information technology for the Greater Cleveland Chapter of the American Red Cross. At the same time, the outpouring of financial support for major national and international disasters in 2005 reduced donations for local Red Cross programs -- a symptom of "donor fatigue," Hankins says. "People would tell us, 'We already gave to the Red Cross' for Katrina or tsunami relief, which is wonderful. But meanwhile, there are still one to three house fires in the greater Cleveland area each night, and we still depend heavily on local donations in order to help those families." Because of the environment in which they were operating last fall, many local chapters of national nonprofits had to dramatically readjust their budgets to continue to execute on their core mission.
Reacting swiftly and intelligently to change is similarly paramount among for-profit companies. Over the past five years, the fortunes of air transportation providers have turned on factors outside these companies' control. Still reeling from the sharp declines in flying since Sept. 11, airlines and a host of other travel-related businesses are now watching soaring oil prices erode their earnings. "Controlling costs within our operational budget has been crucial for us in adapting to these market conditions and continuing to grow our business in some very challenging times," says Guy Sheetz, director of financial services for Airlines Reporting Corp. (ARC), an information hub for passenger air transportation and a resource that air carriers, travel agents, and corporate travel departments can use to simplify their business processes. Sheetz believes that gathering accurate, real-time financial data and quickly relaying it to managers is necessary for controlling operational costs and helping managers make better-informed budget decisions.
BPM Minimizes Surprises
Although the unpredictable forces affecting ARC are different from those concerning the Cleveland-area Red Cross chapter, the two organizations have in common a history of frustrating experiences with spreadsheet-oriented budgeting processes. Both have moved to BPM software to improve their ability to react to unexpected demands on their resources.
Managing a business in an environment that is changing rapidly, especially while negotiating stringent budget parameters, is far easier for organizations that can apply lessons learned from past experience. But such a historical perspective is frequently lost in spreadsheet-based budgets that are rewritten from scratch every year. BPM software helps solve this problem by letting finance build templates that outline the projected resource requirements and costs associated with different types of events, based on data about results in prior periods. This information can either be retained in the BPM application itself or retrieved from spreadsheets, databases, and individuals' memories. Maintaining this type of template in a central location ensures that the next time a similar incident occurs, the organization will be able to immediately factor the known costs into its operating budget and make faster, better decisions about its future course of action.
Likewise, having a clear view of current-period performance is vital for companies to recognize and adjust to potential budgetary problems before they become full-scale crises. For instance, if donations to a particular nonprofit fall 10 percent short of projections for the first three months of the fiscal year or if airline reservations are off by 30 percent in the first quarter, failing to recognize and correct for the trend could leave the organization scrambling to keep important programs and services afloat later in the year. A spreadsheet-based financial management process lacks the means to automatically compare actual revenues against forecasts, which greatly increases the risk that executives will miss key analyses.
A number of BPM software packages address the need for widespread visibility across an organization's key performance indicators (KPIs) by aggregating and graphically portraying the information in a simple, dashboard-like interface. The indicators are easy to understand at a glance; up arrows and green lights mean performance is good, while closer attention may be warranted on metrics for which the light's flashing yellow or the arrow's pointing down. Such an interface shows an executive or a board member at a glance whether a particular area of the organization is meeting expectations.
Some of the more advanced BPM products move beyond this type of top-level reporting to allow individuals across the organization to drill down into reports to discover what's driving KPI trends. For example, if a CFO notices that transportation expenses are rising in some regions but holding steady in others, delving one level deeper into those individual cost centers through the BPM dashboard can help reveal whether fuel prices or equipment maintenance is the problem.
ARC is using BPM software to provide this sort of visibility. The system collects data in real time and makes reports broadly available to all managers so that they can compare current-period numbers with historical data and consider different financial scenarios. "We can now zero in on pricing issues, for example, to analyze the gaps in pricing policies and respond quickly," Sheetz says. "These analytical capabilities help our managers drill into the numbers and capture in-depth revenue data that would otherwise be overlooked."
BPM software can also make rolling forecasts feasible. One problem the Cleveland-area Red Cross encountered when its departmental managers used spreadsheets for budgeting was that when donations fluctuated and the chapter needed to adjust its bottom-line spending, "it was extremely difficult to make adjustments at a program level and reflect the impact of those changes all the way back through to the summary report that goes to our board," Hankins says. "It was practically impossible for us to predict what our finances would look like at the end of the year."
Since the organization implemented a BPM system, both its budgeting goals and information about its actual performance have been made broadly available for viewing in a consolidated report. Now individual program managers have much clearer ownership of their numbers. They can perform rolling forecasts on an ongoing basis, which means they can better keep their budgets up-to-date in comparison with the company's actual income and expenditures. The entire organization benefits because the program managers can reallocate funds as necessary and adjust program resources and service-delivery levels in relation to the organization's overall financial picture. "We can look in our BPM system and instantly see whether a department is above or below its forecasted budget," Hankins says, "and there isn't any question about whether the numbers are right."
Improved Forecasting Drives Cost Savings
Because their software setup gives them more comprehensive intelligence about their finances and supports better-informed business decisions, organizations running BPM systems stand to gain substantial bottom-line returns on their investment in the software.
Hankins reports that over the past five years the Cleveland chapter of the Red Cross has dropped from about 100 employees to 52 and has cut its yearly budget by close to $1 million. Still, he says, the local organization has been able to continue providing the same level of services because of the efficiency gains it has achieved by replacing labor-intensive spreadsheets with BPM software. "This technology has reduced my time on annual budgeting from 80 hours to about four, and similar results are true for my colleagues in other departments," Hankins says. "Our budgets are far more reliable now, and we can forecast what our finances will look like at the end of the year, which was impossible when we were using spreadsheets."
Likewise, Sheetz says, automating ARC's annual budgeting process using BPM software has saved employees five to six weeks' worth of labor, energy they used to spend creating and distributing fiscal reports and budgets. The move also has made employees more directly accountable for their budget numbers and helped ARC leaders spot changing trends sooner so they can take more thoughtful action to keep business performance on track, he says. "The bottom line is that our BPM system strengthens the credibility of our finance team," he adds. "As conditions change, we can quickly provide expert analysis to management on an ongoing basis or just when they need it. That makes us look and feel good."
4 Tips for Reforecasting on the Fly
1. Use the past to predict the future. Bring in historical data stored in various systems and work with employees to define templates, based on that historical data, which can be used to plan for the unexpected. Create these templates in a BPM application that spells out the resources and costs associated with different types of events.
2. Allow the right people to manage their part of the business. Giving line-of-business managers information about both the current situation (actuals) and forecasts enables them to understand and react more quickly to changes within their domain.
3. Take a deeper dive. Make sure the BPM application allows for drilling down beneath the top-level dashboard or reports to reveal the underlying factors driving trends in key performance indicators (KPIs).
4. Roll with the changes. Use the BPM system's inclusion of both budget goals and actual performance in a consolidated report to generate rolling forecasts that regularly update projections of where the organization is going.
Chris Scherpenseel is a general manager within the MBS Group of Microsoft. You can reach him at firstname.lastname@example.org