Budget Planning & Forecasting

Budgeting, planning and forecasting processes are amongst the most neglected and least supported of business information systems. It is therefore not surprising that the planning and approval of capital expenditure budgets, probably the single most specialised aspect of strategic planning, generally receives very little attention from systems developers.

Budgeting is universally acknowledged by management at all levels as a problem area and is often beset by long timescales, unwieldy approval procedures and unreliable data. This brings many organisations to question the value of what is fundamentally seen as a flawed process which absorbs so much valuable management time in providing what is essentially only an historic perspective.

In contrast, there is a growing emphasis on the need for business intelligence systems and therefore a pressing need to shift the emphasis of management reporting away from a review of historical performance to a more forward looking viewpoint that enables management and shareholders to better understand a company's future prospects for success and the critical factors that can materially influence these.

Whilst corporate regulators are urging more transparency and accountability in business reporting generally, it is the quality of business intelligence systems specifically, that is crucial to the delivery of such a standard. Budgeting, planning, forecasting and procurement processes generally are pivotal to this requirement.

The integrated SQL database structures ensure that all data is available at all times for generating forecasts based on the most accurate and up to date information possible. One source of truth for all. Activa provides a single dynamic data source for all key investment and operating decisions.

The Report Analyser in Activa is like a dynamic pivot table and eliminates ’ISLANDS OF ANALYSIS’ where forecasting is done by people using different tools, making different assumptions and accessing different sources of data.

The inputs to Activa are multi-disciplinary, being at the very least, financial and operational in nature. The collective data source therefore represents the broadest possible organisational spectrum and this alone emphasises its overall relevance to the planning function.

For a capital asset replacement budget to be accurate and reliable it relies upon the management processes used to identify the effective life and serviceability of existing fixed assets in the register. This task is all too often made more difficult by neglecting to review the condition and utility of assets during their operational life-cycle.

The most basic fixed asset register can provide source data inputs to forecast both replacement dates and realistic costs for 'off the shelf' ready-to-use assets, even if it does mean manipulating this data through spreadsheets. However, companies with mature asset register systems, those with a dedicated planned obsolescence forecasting capability, are at a distinct advantage over their peers in defining both the timing and replacement costs of assets with established life-cycle histories.

Synchronising the life-cycle of individual depreciating assets and their organisational classification takes the guesswork out of the budgeting process. Integrate a forecasting capability with a modern CapEx Budgeting system and the task of compiling a capital replacement budget for your existing asset base becomes very simplistic.

Planning future expenditure requirements based on large scale, long term, capital projects is quite different from the acquisition of pre-built, ready to use assets and by definition, introduces considerable uncertainty and risk.

Despite expert knowledge, training and techniques around the planning and execution of large projects, they still have the tendency to go SPECTACULARLY WRONG very early in the development process. It is therefore essential to recognise the critical cost drivers and key revenue streams that justify the base capital expenditure and to monitor these over the development and implementation of a project.

It is not common to have finance and operations personnel in the same space and working on the same model. It is essential however, to co-ordinate the analysis, planning, execution, control and commissioning phases of longer term projects with simple but regular sensitivity analyses; to constantly reassess the project viability over the full term. The financial aspects of a project like the cost of capital, cost recovery periods, economic indices or exchange rates, have a measurable impact on its viability but may be insignificant compared to technical or other operational factors. In addition, cost savings or revenue benefits cited in the original business case may turn out to be unrealistic over time.

The success of any commercial project is measured by its return on investment. Sensitivity to variations in input costs, minimising recovery periods and imposing a cap on total funds invested in any venture is the key to maintaining ROI.

Current budgeting practice relies heavily on spreadsheets which are an excellent medium for representing complex detail at an individual level but are rarely complete in their logic and formulae and can lead to inadvertent errors with adverse consequences.

Most budgets inputs are the product of many individuals and sources with different viewpoints and technical objectives. They are commonly developed in functional isolation and incorporate costings and assumptions that are not necessarily visible to other disciplines. This can result in outcomes that are not automatically reflected in other aspects of the same project. Any lack of collaboration here jeopardises the outcomes and makes it difficult to collate and combine the data into a coherent corporate plan.

Creating a detailed plan for a long term, complex project requires that each major component be correctly categorised at the outset. Property, plant and equipment, borrowing costs, decommissioning, restoration, contract costs and intangible assets are all dealt with separately under IFRS and most GAAP and there are subtle differences in the recognition of costs and their impact on future operating outcomes as a result.

Standards also require that any item of property, plant and equipment that has a significant cost be depreciated as a separate item. Where assets are constructed over time, costs associated with design, engineering, government permits, labour, site preparation, installation, professional consultants fees and particularly progress payments, that are recorded separately need to be recognised as a part of the final capitalised asset. This is often not the case leading to understated and misleading asset values on the one hand and dis-associated meaningless intangible asset records on the other.

Manual controls and spreadsheets only provide limited support for governance processes and audit. They actually inhibit the tracing of changes back to the individuals who actually applied them. It is only through specialised procurement systems that this task is transformed into a controlled and reliable process that accurately recognises component costs and maintains a complete record of transactions.

Recognising the need for a totally integrated approach to corporate planning is a first step in re-aligning your business objectives. Recognising that business intelligence is not just an IT solution is the second. Business intelligence is not about a data warehouse and the ability to regurgitate reports and 'dashboards' at will. It is not about how much information you have. There is very little that's intelligent about that if it has no meaningful context.

Business intelligence is all about the quality of information, its relevance to your business performance, how you interpret it, how and to whom you communicate it.

Budgeting, planning and forecasting are fundamentally important activities in any business. Recording and monitoring accurate and reliable data, bringing together the best intellectual resources of the business, formulating a strategic plan based on sound economic judgement and communicating that plan to key personnel makes perfect business sense.

Activa takes these issues seriously in designing systems where the basic tenets are accuracy, transparency and efficiency.

Historically, budgeting techniques were annual and biased towards the qualitative model engaging historical operational and life-cycle data, independent research and informed opinion and judgement with only limited quantitative analysis. There is belief in some quarters that the entire budgeting process is a futile exercise.

More recently there is growing momentum for rolling forecasts. This is a series of quarterly forecasts, short-term, usually over 18 months that are recast and extended at the end of each successive quarter.

Rolling forecasts are usually integrated with performance analysis that reviews a little more than just the profit and loss account; key cost drivers are rarely obvious in a financial report. Generally speaking, the greater the business uncertainty the shorter the forecasting period and the rolling forecast enables more frequent modification to budget predictions than is possible with the traditional annual budget.

However, this type of approach requires discipline and should not be undertaken lightly. It depends on a number of key issues; the availability of accurate and reliable financial and performance data that reflects real events and operational factors, exploitation of the experience and knowledge vested in operational line managers, the need for these people to communicate successfully with one another and the ability to bring the whole thing together repeatedly without over-stretching the limits of IT systems and human resources.

Most of all it requires the will and commitment of management to do the work required to make it happen.

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Article last updated : Feb 23 2012 9:44AM