The annual planning process is one of the most strategic events for a company. It defines how a company will tactically execute its vision and meet its goals. Surprisingly, 85 percent of executives spend less than one hour a month on strategy, and over 60 percent do not link strategy to execution.
An integrated close process links the planning and forecasting processes in order to provide a reliable and consistent predictor of actual operating results. In doing so, it enhances the control environment, reduces costs, and improves an organization's standing with external stakeholders.
In today's "here and now" business environment, many organizations have underinvested in the infrastructure of their finance department. Large ERP implementations -- many of which failed to deliver expected results -- and endless documentation of internal controls have diverted funding away from core finance processes and infrastructure. This, combined with acquisition and divestiture activity, has left many organizations with disjointed data based on different definitions and standards across departments.
What's more, many organizations have detached the management reporting function from financial reporting to better support operating units. While in theory this places better information in the hands of operating managers, it can have disruptive and unintended consequences.
Five common causes include:
• Disparate sources of data. An increasing number of "shadow accounting functions" in today's organizations create data used for operating decisions that are not connected to actual financial results, which generally produces expectations that differ from actual results.
• Poorly understood business drivers. As organizations try to grasp operating forecasts, they often request accounting information rather than operating information. This assumes that operating managers have the skills required, but most managers are primarily focused on managing costs.
• Differences in basis. As GAAP has become more complex and specifically applied, the elections of certain accounting treatments are not widely communicated or understood.
• Unrealistic expectations. Organiza-tions with a significant front-end sales or pipeline element often find themselves spending a great deal of time understanding and interpreting the pipeline, only to have actual results differ significantly from expectations.
• Fear of delivering bad news. Delaying bad news can lead to overcommitting early in the game. Providing a conservative forecast up front in order to lower expectations early and overdeliver when actual results are calculated is a "bad news" avoidance strategy that can be detrimental.
Forecasting is the process of periodically projecting business unit performance based on changes in business conditions and other factors. Budgeting is a process that operationalizes a plan. Forecasting identifies the divergence from that plan.
To maximize the forecasting process, two key principles should be adopted.
First, a company-wide approach should be implemented in order to break down departmental silos and promote collaboration.
Second, "spreadsheet farms" should be avoided by taking advantage of the automation efficiencies offered by the latest planning systems.
Once the mind-set is established, a company should begin to do the following:
• Improve forecast accuracy. Under-stand the appropriate level and timing of the forecast. Use modeling techniques. Identify and resolve the root causes of poor forecast accuracy. Implement advanced forecasting techniques as appropriate.
• Evaluate advanced applications. Form the foundation for advanced planning, budgeting, and forecasting capabilities. Understand vendor capabilities and screen the market for appropriate candidates.
• Optimize planning, budgeting, and forecasting processes. Adopt a holistic view of related organizational, technical, and process components. Drive efficiency and effectiveness into the process through the creation of integrated solutions covering each of these areas.
Unquestionably, the forecasting function is an essential piece for an integrated close. A poor forecasting function elongates the close through needless reconciliations and revisions to MD&A, often resulting in unwelcome surprises. Forecasting that delivers predictable results not only adds internal control and confidence, but also signals to those outside the organization that management has a firm hand in understanding the drivers that impact its results.