FP&A Trends Survey 2023: Define the future of FP&A
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By John Stretch, MD at Stretch Business Training
1. Variances are based on current, not outdated, information
In a rolling forecast, each business unit sets a monthly or quarterly target and reports actual performance against this target. Since these targets are based on current information, “excuse variances” are eliminated or reduced.
2. Strategy is no longer an annual event but a continuous dialogue between head office and the business units
Shifts in strategy are communicated down the line immediately, and their financial effect is quantified and translated into rolling forecasts. With annual budgets, organisations have to wait until the next budget year before including the effect of strategy changes in their targets.
3. Rolling forecasts avoid the effects of unrealistic and unattainable budgets
When a management team is judged and incentivised on their performance against a budget that has become impossible to achieve due to an external event beyond their control, they can easily become demotivated. Rolling forecasts have a significant motivational impact because they direct management’s attention towards the future, not the past, and help ensure that planning is ongoing instead of an annual exercise.
4. Forecasts enable better anticipation of change, greater responsiveness and flexibility
In earlier years, budgeting was the only opportunity for middle and lower management to compete for resources and senior managers to decide where resources should be allocated. Organisations were managed by developing and approving plans and then achieving planned results. The budget was cast in stone, and the job of managers was to respond to threats and overcome them.
In today’s world of continuous change, rolling forecasts quantify the effects of change in prices, markets and drivers, and communicate the results to managers.
5. Rolling forecasts can reduce disruption, time taken, and thus the cost of the annual budget
For those companies that combine rolling forecasts with a detailed annual budget, high-level forecasts are already available for the next financial year when budgeting starts. These forecasts should have been developed using drivers supplied by line managers themselves and thus should be seen to be realistic and enjoy managers’ buy-in. The budget process then translates these targets into detailed line-item budgets.
6. Improves the organisation’s ability to forecast and thereby manage investor and banker expectations
Forecasts are highly valued by the investment community and by bankers. Rolling forecasts harness the organisation’s understanding of the future and provide an ideal platform for dealing with analysts. The share price can suffer when analysts and investors react to a significant mismatch between an outdated budget and actual results. Bankers’ appetite for lending can be influenced by forecasts.
7. Encourages managers to think more strategically and promotes a better understanding of the organisation’s value drivers
When managers understand the factors that drive results, they start to focus on the financial effect of these drivers rather than on each line of the budget. Rolling forecasts thus translate strategy into action in a controlled way. Forecasts are used to drive strategy implementation instead of being extrapolations of the past.
8. Reduces game playing and padding of targets
When managers are required to deliver specified financial results, while many of the variables underpinning these results are beyond their control, they may be tempted to protect themselves by understating revenues and overstating costs or negotiating a lower bottom line.
9. Existing budget systems are outdated; budgeting has become a badly run, stale and boring exercise
Many managers are frustrated by time-consuming, costly, unresponsive approaches to budgeting. They comment that the whole process takes too long to be meaningful. In a poorly managed budget exercise, managers budget by adding a percentage to the previous year’s figures.
10. We have the technical capability
In the previous century, annual budgeting was the only feasible approach due to limitations in the speed of communications and computation. Today, the pace of business change is extremely rapid, and thus a sluggish planning and budgeting process can be a competitive disadvantage.
Today’s FP&A practitioners are highly trained professionals with a greater ability to see the big picture, analyse and interpret data, and build predictive models. They are also experts in harnessing the power of information technology. They are able to create detailed cost and revenue databases that unlock patterns and trends in business behaviour and to build sophisticated and responsive forecasting models. We do rolling forecasts because we know they are better and because we can.
The article was first published in Unit 4 Prevero Blog.
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