Financial Planning, Budgeting, and Forecasting

Transcription

1 Financial Planning, Budgeting, and Forecasting February 2010 Nasreen Quibria, Cindy Jutras

2 Page 2 Executive Summary Few companies remain unscathed in the aftermath of the economic crisis. The economic uncertainty of the last few years made it difficult to set clear goals and objectives and sustain a financial plan to support them. Even as the global economy works its way out of a recession, CFOs have to rethink their attitudes and approaches to financial strategy and planning. Driving improvements in active financial planning, budgeting, and forecasting can help companies to emerge stronger as the economy recovers. Best-in-Class Performance Aberdeen used four key performance criteria to distinguish Best-in-Class companies. These top performers are notable for achieving the following aggregate results: 102% overall budget accuracy (ratio of actual performance to budget) 99% forecast accuracy 20% improvement in profitability year over year 66% always finalize budget prior to the next fiscal year Competitive Maturity Assessment Top performers in this study shared several common characteristics. The Best-in-Class: are 106% more likely than Laggards to be able to reforecast as market conditions change have more visibility into the organization as they are 66% more likely to be able to drill down to successive levels of detail from summary positions are 58% more likely to have established enterprise-wide collaboration across departments / divisions during the financial planning process Required Actions To mitigate the effects of evolving market conditions and achieve Best-in- Class performance, companies should: Utilize budgeting and forecasting processes to integrate strategic planning and operations Invest in financial and forecasting applications that provide flexibility to changing business conditions Establish collaborative budgeting and forecasting practices throughout the organization, involving more than finance Research Benchmark Aberdeen s Research Benchmarks provide an indepth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations Maturity-Class Framework Based on Key Performance Indicators (KPIs), Aberdeen segments companies into: Best-in-Class: Top 20% of performers Industry Average: Middle 50% of performers Laggard: Bottom 30% of performers The budget has to be flexible. The economy is so volatile no one knows what s going to happen. ~ James Kraus, Controller, US Axle Inc.

3 Page 3 Table of Contents Executive Summary...2 Best-in-Class Performance...2 Competitive Maturity Assessment...2 Required Actions...2 Chapter One: Benchmarking the Best-in-Class...5 Business Context...5 The Maturity Class Framework...7 The Best-in-Class PACE Model...8 Strategies: Planning for Value...9 Chapter Two: Benchmarking Requirements for Success...12 Competitive Assessment...13 Capabilities and Enablers...15 Chapter Three: Required Actions...23 Laggard Steps to Success...23 Industry Average Steps to Success...23 Best-in-Class Steps to Success...24 Appendix A: Research Methodology...25 Appendix B: Related Aberdeen Research...27 Figures Figure 1: Aberdeen s Financial Planning, Budgeting, and Forecasting Research Timeline Following the Trend in Real GDP...5 Figure 2: Leading Pressures Year over Year*...6 Figure 3: Companies Approach to Financial Budgeting...7 Figure 4: Trend in Overall Budget Performance*...8 Figure 5: Strategic Actions Year over Year for the Best-in-Class...10 Figure 6: Companies with Formal Processes...10 Figure 7: Re-forecast Frequency...11 Figure 8: Optimized Process Capabilities...15 Figure 9: Collaboration with Top-down / Bottom-Up Approach...16 Figure 10: Corporate Culture of Top Performing Companies...17 Figure 11: Linking Compensation with Budget Accuracy...18 Figure 12: Knowledge Management Capabilities...19 Figure 13: Process Automation...20 Figure 14: Performance Management Capabilities...20 Figure 15: Financial Planning, Budgeting, and Forecasting Technologies...21 Figure 16: Business Intelligence and Analytics...22 Tables Table 1: Top Performers Earn Best-in-Class Status...7

4 Page 4 Table 2: The Best-in-Class PACE Framework...9 Table 3: The Competitive Framework...14 Table 4: The PACE Framework Key...26 Table 5: The Competitive Framework Key...26 Table 6: The Relationship Between PACE and the Competitive Framework...26

5 Page 5 Chapter One: Benchmarking the Best-in-Class Business Context Global economic conditions of the past few years drove businesses to become increasingly cautious about the near-term future. Increased focus on improving flexibility to dynamically account for change has shifted attention away from budget accuracy and put companies at risk of falling short of shareholder expectations. In 2010, with a renewed focus on strategic goals and corporate performance, organizations that hope to achieve Best-in-Class status must be armed with tools that provide visibility and flexibility to strike a balance between caution and driving changes to create a competitive advantage as the market improves. Aberdeen Research Follows Business Cycle Inflection Points Aberdeen research on financial planning, budgeting, and forecasting has closely followed the trend in economic cycles as reflected in the timeline below (Figure 1). Fast Facts The Best-in-Class forecast with 36% greater accuracy than Laggard companies, 11% better than the Industry Average Top performing companies have made 20% gains in profitability in the last year through better planning, budgeting, and forecasting Figure 1: Aberdeen s Financial Planning, Budgeting, and Forecasting Research Timeline Following the Trend in Real GDP Percent Change in U.S. Real GDP Financial Planning Budgeting, and Forecasting: Managing in Uncertain Economic Times, January Financial Planning and Budgeting, April 2008 Financial Planning Budgeting, and Forecasting: Will the Economy Emerge? Will You?, February 2010 Sources: Bureau of Economic Analysis, Aberdeen Group, February 2010 When Aberdeen conducted its first study in 2008, the market was showing premature signs of improvement with an increase in real Gross Domestic Product (GDP) after a pronounced period of deceleration in economic activity. In response to changing macroeconomic conditions, Aberdeen followed with its next study in less than 12 months as the market experienced a steep drop in the change in real GDP to -6.4%. In 2010,

6 Page 6 although there is some indication of an upturn in the global economy in the first quarter, results from the latest survey reveals finance executives still remain relatively hesitant of economic prospects. Pressures: Focus on Agility Now in its third year, Aberdeen's annual survey on Financial Planning, Budgeting, and Forecasting (FPBF) benchmarked over 170 companies, finding several notable differences in the pressures impacting the FPBF process, compared to earlier research. With the economy in a flux, adaptability and agility in financial planning and forecasting continues to be at the top of the corporate agenda (Figure 2). Figure 2: Leading Pressures Year over Year* Market volatility creates the need to dynamically account for change ('agility') Need to better align Planning / Budgeting with corporate goals Corporate mandates for cost control Current / past accuracy of the budget negatively impacts corporate performance Current processes are too long & resource intensive 22% 25% 21% 24% 29% 34% 32% 34% 39% 37% 34% 41% 42% 47% % 10% 20% 30% 40% 50% Percentage of Respondents *Respondents were asked to select the top two pressures Definitions For the purposes of clarity and consistency, Aberdeen defines the following terms as such: Financial planning is the process by which a business documents and communicates in financial terms. A financial planning exercise typically contains detailed plans and budgets, as well as analysis to show how the objectives are to be realized. Budgeting is (typically) an annual process that often starts with the prior year's actual performance data, and includes the creation of detailed budgets showing expected future performance at a top-line and detailed level across the entire organization. Forecasting is a process by which businesses adjust future expectations based on recent actual performance resulting in production of an updated forecast document. This can (but does not typically) include adjustments to the budget. Forecasting, re-forecasting, or "rolling-forecasting" can occur multiple times during a budget period, and can span time from one fiscal period to the next. Of note, while budget accuracy was of paramount importance in 2008, the demand for accuracy plummeted last year and actual performance against accuracy declined along with it. This trend continues in 2010, although accuracy rebounded. However, many companies today will use the overall budget as a yardstick of performance, but manage directly to the most recent forecast. A secondary pressure that emerged in 2010 is the need to better align planning and budgeting with corporate goals. Strengthening the link between the budgeting and forecasting and strategic objectives is the hallmark of an integrated financial planning process that can provide potential competitive edge to CEOs and CFOs beyond budgeting and reporting. Indeed, in the case of top performing companies, strategy drives the budget (71%). But for

7 Page 7 30% of average and 28% of Laggard businesses, operational and financial plans developed independently of strategic goals reflects a lack of value in planning efforts and an absence of a well-defined strategy (Figure 3). Figure 3: Companies Approach to Financial Budgeting Percentage of Respondents, n = % 50% 25% 0% Best-in-Class Industry Average Laggard 71% 44% 50% 26% 30% 22% 14% 14% 28% Budget drives strategy Strategy drives budget Strategy and budget are independent The Maturity Class Framework Aberdeen used four key performance criteria to distinguish the Best-in- Class from Industry Average and Laggard organizations (Table 1). The choice of metrics was based on indicators that measure performance in financial planning, budgeting, and forecasting. Overall budget accuracy reflects the ratio of actual revenue and cost (bottom line) to budget, with 100% accuracy as the ideal. A budget which is 100% accurate is reflective of either an accurate prediction of revenue and costs, or good controls in place to manage against budget, or both. The accuracy in overall budget is tempered with improvement and / or preservation of profitability. An organization s ability to finalize the budget prior to the beginning of the new fiscal period is indicative of the performance of the financial planning and budgeting process. This is the first year Aberdeen has included forecast accuracy in its Best-in-Class criteria, reflecting the rising importance placed on agility. Table 1: Top Performers Earn Best-in-Class Status Definition of Maturity Class Best-in-Class: Top 20% of aggregate performance scorers Mean Class Performance 102% overall budget accuracy (ratio of actual performance to budget) 99% forecast accuracy 20% improvement in profitability year over year 66% always finalize the budget prior to new fiscal period

8 Page 8 Definition of Maturity Class Industry Average: Middle 50% of aggregate performance scorers Laggard: Bottom 30% of aggregate performance scorers Mean Class Performance 92% overall budget accuracy (ratio of actual performance to budget) 89% forecast accuracy 6% improvement in profitability year over year 37% always finalize the budget prior to new fiscal period 66% overall budget accuracy (ratio of actual performance to budget) 73% forecast accuracy 8% decline in profitability year over year 27% always finalize the budget prior to new fiscal period Year over Year Trends in Overall Budget Performance Although for leading companies overall budget accuracy has improved considerably in the past year, for all others the focus on agility has been at the expense of accuracy with a rate of decline of 6% for the Industry Average and a significant 24% for Laggards since 2008 (Figure 4). Figure 4: Trend in Overall Budget Performance* % 100% 80% 60% 108% 101% 102% 98% 94% 92% 87% 77% 66% 40% 20% 0% Best-in-Class Average Laggard *Overall budget accuracy is a ratio of actual performance to budget The Best-in-Class PACE Model Optimizing financial planning, budgeting, and forecasting requires a combination of strategic actions, organizational capabilities, and enabling technologies that can be summarized as shown in Table 2.

9 Page 9 Table 2: The Best-in-Class PACE Framework Pressures Actions Capabilities Enablers Market volatility creates the need to dynamically account for change ("agility") Involve more decision-makers in the planning / budgeting / forecasting process Develop and automate process flows (budgeting, forecasting, etc.) Ability to re-forecast as market conditions change Ability to track actual performance versus budget / forecast Capability to perform what if scenarios and change analysis Those accountable for delivering against the budget are involved in the planning process Business unit managers work collaboratively with finance throughout the process Workflow automation Corporate or enterprise performance management application Budgeting / forecasting applications Financial reporting and consolidation Query and reporting tools Enterprise BI platforms Dashboard / scorecard tools Secure integration of spreadsheets with enterprise applications Event management (triggers / alerts) Data cleansing and integration tools, ETL Strategies: Planning for Value Financial planning is a continuous process that is needed to meet strategic goals and objectives. The continued uncertainty in the market is exposing the flaws in existing underlying financial planning for operations and financing of businesses. As with last year, companies in general are continuing to focus on reengineering business processes to enhance productivity and efficiency by developing a formal planning and budgeting workflow process (44% in 2010 from 46% in 2009, or little change). However, the shift in the top strategic action for the Best-in-Class from 2009 to 2010 is dramatic. The top strategy in 2009, improving data quality, moved to near bottom in terms of priorities. Instead, the top strategic action that emerged for companies in 2010 reflects the general business sentiment to develop a formal planning, budgeting, and forecasting workflow process in response to the top two pressures meeting the demands of an ever changing environment and a need to better align planning / budgeting with corporate goals (Figure 5). With added process and data automation, data quality also improves and becomes less of a separate priority.

10 Page 10 Figure 5: Strategic Actions Year over Year for the Best-in-Class Develop a formal planning / budgeting / forecasting workflow process Automate the process flows associated with the budget process Involve more decision -makers in the planning / budgeting / forecasting process Improve data quality 20% 19% 47% 40% 41% 38% 40% 52% Develop a consolidated view of the process and the results, to be available on demand 19% 28% 0% 10% 20% 30% 40% 50% 60% Percentage of Respondents Surprisingly, there are still companies that lack a formal process for planning and budgeting (28%) and forecasting (37%) as shown in Figure 6. Industry Average and Laggards are 38% less likely to already have a formalized process for financial planning and budgeting and 52% less likely to have a formalized forecasting process in place. The top strategic action reflects the market need for a formalized, automated workflow process in financial planning, budgeting, and forecasting. Figure 6: Companies with Formal Processes Percentage of Respondent, n = % 75% 50% 25% 0% Best-in-Class Industry Average Laggard 94% 88% 70% 63% 63% 50% Planning and Budgeting Forecasting

11 Page 11 Aberdeen Insights Enhancing Agility, Mitigating Risks Today's industry dynamics demand that corporate management execute new strategies rapidly. Companies are realizing the limitations of static annual plans and the shortcoming of limited horizons. Notably, 0% of companies desire to forecast just once a year (Figure 7). More companies are forecasting performance every quarter (32%), but businesses clearly have an appetite for improvement and seek to revise forecasts on a monthly basis (40%). A rolling forecast revised monthly, quarterly, or at the very least semi-annually can ensure that financial planning is continuous and dynamic. Acknowledges James Kraus, Controller at US Axle, Inc., "Given the economic trends and the fluctuations with the economy, we have a strategic team that now meets on a monthly basis. I'm forecasting cash requirements and cash availability for the company; forecasting certain months out and keep rolling it forward in order to follow the trends." Figure 7: Re-forecast Frequency Current Frequency Desired Frequency 45% 40% 40% Percentage of Respondents, n = % 30% 25% 20% 15% 10% 5% 0% 21% 13% 4% 1% 1% 1% Never On Demand 17% 9% 26% 32% 18% 2% 5% Daily Weekly Monthly Quarterly Semi- Annually 2% 0% Annually Forecasting models are also generally based on previous historical trends that are not very effective in predicting a black swan, or a very rare, potentially catastrophic event. Businesses that use traditional static budgeting and planning processes can miss opportunities and emerging risks may go unnoticed. The unprecedented financial crisis that started with the US housing bust and subsequent disruptions in business plans of every sector of the economy have prompted more companies to develop contingency plans. To do so, finance departments are adopting processes and tools including rolling forecasts and scenario analysis modeling to help them provide better insight into future financial indicators and the risks and rewards of strategic actions. Chapter 2 explores this further.

12 Page 12 Chapter Two: Benchmarking Requirements for Success The deterioration in the global economy between 2007 and 2009 left many CFOs scrambling to cut costs and reprioritize budgets. Finance executives are using the aftermath of the crisis to get budgeting and planning in their companies better aligned with the new realities. Case Study Coleman Cable, Inc. In the wake of the economic turmoil in late 2008, Coleman Cable, Inc., a leading manufacturer and innovator of wire and cable products, reduced its financial planning and budgeting staff by almost 70%. Like many companies working with limited resources, Coleman Cable was able to leverage technology to enhance business performance and improve budgeting and forecast accuracy. While Coleman Cable had a financial planning tool in place prior to 2008, the company still relied heavily on spreadsheets to perform critical budgeting and forecasting tasks. Each department, distribution center, and production plant had customized templates and multiple spreadsheets. "We would have over 60 different spreadsheets at any given time. This was cumbersome from a structural perspective difficult to consolidate data, perform uniform changes, version control, and audit trail was a significant issue. The manual effort in generating the spreadsheets were also error-prone, commented Denise Feece, Director of Financial Planning and Analysis. All of this hindered Coleman Cable s ability to respond to the market forces accurately and with speed. "Our budgeting process would take about 3 to 5 months prior to our new system," said Feece. With a new financial planning and budgeting system in place, Coleman Cable was able to realize significant improvements, reducing its financial planning and budgeting cycle by nearly 200%. According to Feece, "The budget process for 2010 started in October 2009 and we finished in the middle of November All totaled, it took about six weeks, down from 3 to 5 months last year." Also, Coleman has been able to reduce errors and increase accuracy in its financial modeling. Added Feece, "We are about 95% accurate with forecasting out 60 to 90 days, and we are moving to become better at forecasting further out with the same level of accuracy. Overall, we are much more accurate than in the past." The new financial and budgeting application has enabled Coleman Cable to automate a number of processes that were previously done by hand. "Just automating our payroll which is a lot of data saves us 3 to 4 hours per week. Something that would take half of a day before, now takes less than an hour," said Feece. Employees can now focus on more the more critical task of analyzing data. continued Fast Facts Best-in-Class enterprises are 74% more likely to perform "what if" scenario analysis modeling Leading companies are 91% more likely to incorporate business drivers into the forecasting process 66% of top performing companies have established a planning / budgeting committee or center of excellence

13 Page 13 Case Study Coleman Cable, Inc. An added benefit has been the standardization of data collection and coordination. "We have gone to meetings where sales, finance and production were using different numbers in their analysis. "Now there s one source of the truth," said Feece. With its current system, Coleman Cable has also been able to achieve higher levels of visibility by creating company dashboards based on the most up-to-date data. "Over the past year, we developed models (personnel, financial, production, etc.) reporting that is able to be distributed on a routine basis and available to a multitude of people. Much of information that s available now [through dashboards] and wasn t available in the past, except on as requested basis," said Feece. This level of transparency has the added benefit of reducing the number of total data requests to the finance department. "Some requests to pull together certain data have gone away because the data is available in the current system. The system even allows for everyone with access to do some of their own ad hoc analysis." Coleman Cable now uses its current financial planning system to do more than budgeting and planning. Sales data, production data, and personnel data are now handled within the current system. "We have a budget model, but we also have a sales model, that uses the same technological platform. We are able to slice the data and look at things like profitability per customer or look at production, personnel and payroll data the same way," said Feece. The versatility of the technology has enabled Coleman Cable to maximize its investment. Coleman Cable continues to look for additional opportunities to leverage their current system to achieve higher levels of operational efficiency. Concludes Feece, "There are still processes within our departments and with our month end processes that we ve targeted as places we can reduce the amount of time to complete them with the technology. Competitive Assessment Aberdeen Group analyzed the aggregated metrics of surveyed companies to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (the approach, workflow and procedures identified for constructing and managing the planning, budgeting and forecasting activities); (2) organization (corporate focus and collaboration among stakeholders); (3) knowledge management (contextualizing data and exposing it to key stakeholders); (4) technology (the selection of the appropriate tools and the effective deployment of those tools); and (5) performance management (the ability of the organization to measure its results to improve its business). These characteristics (identified in Table 3) serve as a

14 Page 14 guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics. Table 3: The Competitive Framework Best-in-Class Average Laggards Ability to reforecast as market conditions change Process Organization Knowledge Technology Performance 66% 52% 32% Ability to perform what if scenarios and change analysis 59% 38% 27% Ability to incorporate business drivers into the on-going forecasting process 61% 40% 20% Established enterprise-wide collaboration across departments / divisions 63% 45% 33% A planning/budgeting committee or center of excellence has been established 66% 35% 25% Mid to senior level managers accountable for delivering against the budget are involved in the financial planning and budgeting process 84% 69% 59% Able to perform multi-dimensional reporting with roll-ups 45% 33% 14% Able to drill down to successive levels of detail from summaries 58% 38% 30% Version control of budgets is automated using enterprise applications 33% 19% 13% Able to conduct "what if" scenario with partial or full automation 47% 30% 13% Able to track actual performance versus budget 91% 83% 66% Able to integrate and align sales forecasts with overall business revenue and cost forecasts 68% 45% 22% Most of the users have access to Excel front end integrated to the ERP system. Actuals are pushed on a weekly basis to the planning/budgeting system based on which planning is done. Plan values are adjusted based on the actuals to determine the forecast. Then the reports compare these with actual or adjusted budgets. Finally the managers run reports which provide them with the necessary information to review and manage. ~ Anand Iyer, Manager, GMAC FS

15 Page 15 Capabilities and Enablers Aberdeen's analysis of the Competitive Framework reveals that Best-in- Class enterprises leverage a range of solutions and strategies across the scope of process, organization, knowledge management, technology, and performance monitoring to enhance financial planning, budgeting, and forecasting activities. Process Optimization for Dynamic Planning One of the most challenging aspects of planning and budgeting is process mechanics. As noted in Chapter One, the top pressure facing companies is market volatility, and traditional static approaches to strategic planning, target setting, investment planning, budgeting and forecasting are proving to be inadequate. One of the first steps is establishing and implementing corporate processes for budget revisions, roll-ups and approvals. In practice, the overall level of process standardization is generally low (59% of all enterprises). Laggard companies are 45% more likely to lack general standardization in processes across the organization (Figure 8). In many cases, standard procedures are available but they are not known or have not been adopted, which leads to multiple requests for the same information, differing formats, errors in consolidation frustrating the process and extending budget and planning cycle times. Companies are able to make strategic decisions as a result of greater visibility and transparency in the financial planning and budgeting process. We hold monthly management meetings discussion on budget results. [And] quarterly for all employees an all hands meetings with management. All information is available in our ERP and available to managers. ~ Douglas Shelly, CEO, Maple Tree Technologies LTD Figure 8: Optimized Process Capabilities Best-in-Class Industry Average Laggard Percentage of Respondents, n = % 60% 40% 20% 66% 52% 2.1x 32% 59% 2.2x 38% 27% 61% 40% 3x 20% 71% 71% 65% 59% 60% 49% 0% Ability to Ability to perform reforecast as what if scenarios market conditions and change change analysis Ability to incorporate business drivers into the on-going forecasting process Finalized goals and budgets are clearly communicated to those who are held accountable Corporate process for budget revisions, roll-ups, and approvals have been established and implemented The budgeting and planning process can take a few different approaches: top-down, bottom-up, and combination of both (Figure 9). In the top-down

16 Page 16 approach, high level executives make the decisions handed down to the organization based on the strategic agenda they have developed. In contrast, bottom-up budgeting provides employees the opportunity to be involved in setting their own goals and expectations for a given financial period, as well as create a more accurate picture of how much each department / division needs in order to function effectively. Leading companies use a coordinated system of top-down and bottom-up planning and budgeting that links the performance of the business units to a company s strategic vision. Indeed, the Best-in-Class are 28% more likely to use a balanced blend of topdown and bottom-up approach along with active communication and dialogue throughout the process than Laggard counterparts. Figure 9: Collaboration with Top-down / Bottom-Up Approach Percentage of Respondents, n = % 50% 25% 0% Best-in-Class Industry Average Laggard 34% 22% 25% 14% 18% 50% 48% 35% 39% Bottom-up Top-Down Combination Top-down, Bottom-up Today's unpredictable and fast-paced business climate is proving traditional budget methods to be ineffective. Aberdeen survey shows a decline in trend (7% decrease in the past year) in the historical line-item budgeting approach that is based on the previous year s expenditure and revenue data. Instead, companies are shifting more towards performance based budgeting that is results-oriented focusing on outcomes rather than expenditures. The uncertain economic environment has also prompted business leaders to reexamine their business plans and execute frequent mid-course corrections. Scenario-based planning can model the consequences of both positive and negative changes to support decision making in operational expenditures and resources. Leading enterprises are 2.2 times as likely as Laggard performers to model what if scenarios, and 2.1 times as likely to be able to reforecast, as market conditions change, to redirect resources to maximize value creation (Figure 8). Forecasts also serve as a valuable tool in fine-tuning the decision-making process. With external economic factors and the emergence of new competitive threats, the ability to perform forward-looking analysis that incorporates business drivers is vital. High performing companies are 91% more likely to incorporate key value drivers such as market share, market size, product maturity, number of competitors, commodity prices,

17 Page 17 exchange rates, and other key industry specific variables into the on-going forecasting process. Organization: Communication and Collaboration Finance cannot work in isolation and should integrate all facets of the business including, operations, sales, marketing and human resources. A key element of a successful planning and budgeting process is to include participants and stakeholders in establishing standards that dictate both the objectives and accountability to help ensure buy-in to the process and the results. High performing companies are almost twice as likely as Laggards to have enterprise-wide collaboration across departments and business units, as well as 91% executive support of the budget / planning process, 25% more than those that have not reached Best-in-Class status (Figure 10). Leading companies have also established a planning / budgeting committee or center of excellence (66%). Figure 10: Corporate Culture of Top Performing Companies Senior management is fully supportive of the budget / planning process 63% 91% 80% Mid to senior level managers accountable for delivering against the budget are involved in the financial planning and budgeting process 69% 59% 84% A planning/budgeting committee or center of excellence has been established 35% 25% 66% Best-In-Class Industry Average Laggard Established enterprise-wide collaboration across departments / divisions 33% 45% 63% 0% 20% 40% 60% 80% 100% Percentage of Respondents, n = 171 Collaboration must be also combined with effective communication. To gain buy-in, those held accountable should have input into objectives and related performance targets. Top performing businesses are 29% more likely to have mid and senior level managers, who are held accountable for delivering against the budget, participate in the financial planning and budgeting process. Such involvement promotes understanding of expectations and provides a sense of ownership. Leading companies are also linking strategic planning to compensation (Figure 11). For 61% of businesses, strategic goals cascade down to individual objectives. Along with accountability, connecting financial planning to performance evaluation and compensation is illustrative of a corporatewww.aberdeen.com Fax:

18 Page 18 wide commitment to a more accurate and efficient process that is carried out into the execution phase. Figure 11: Linking Compensation with Budget Accuracy Percentage of Respondents, n = % 40% 35% 30% 25% 20% 15% 10% 5% 37% 28% 22% Best-in-Class Industry Average Laggard 41% 34% 24% 19% 14% 13% 14% 14% 6% 20% 10% 6% 0% Senior management only Mid-level management and above All salaried workers All employees No one Knowledge Management: The Visibility Factor Businesses need accuracy and transparency in their planning, budgeting and forecasting processes in order to drive strategy and positively affect their performance. In highly effective companies, strategic value delivered by the finance department is closely linked to visibility. Best-in-Class organizations are 66% more likely to be able to drill down to successive levels of detail from summary position, than their peers (Figure 12). This level of detail can provide a holistic view of operations to drive successful execution of business strategies. Further, leading corporations are 3.2 times as likely Laggards to be able to perform multi-dimensional reporting based on geographies, product lines, time periods, and other dimensions which then roll-up to integrated financial statements (i.e. Profit & Loss (P&L), balance sheet, and cash flow) enabling transparency and collaboration across the organization.

19 Page 19 Figure 12: Knowledge Management Capabilities Percentage of Respondents, n = % 60% 50% 40% 30% 20% 10% 0% Best-In-Class Industry Average Laggard 58% 45% 38% 33% 30% 14% Able to perform multi-dimensional Able to drill down to successive reporting with roll-ups levels of detail from summaries Technology: The Value of Automation In many instances, each business unit maintains a unique data set for its operational purposes, and reconciliation among unit information sources is difficult and time consuming. Beyond consolidation of data, the review and approval steps in most organizations can be extensive. Because these are often done manually, a lot of time is spent on low-value-add components of the budgeting and planning process. Yet although twice as likely as their peers, automated version control is only adopted by 33% of Best-in-Class companies. Similarly, less than half (47%) of leading companies have a fully or semi-automated ability to perform what if scenario modeling analysis, yet are 96% more likely to than all others (Figure 13). For more than half of companies (54%), the budgeting cycle takes between three and four months to complete. Organizations that take several months to establish their budgets (three, six, nine, or even more) may find the original assumptions obsolete by the time the planning process is complete. Countless hours of data processing can be reduced, if not eliminated, by automating and integrating the budgeting and planning process, turning finance from a backoffice process to a more strategic, value-added function.

20 Page 20 Figure 13: Process Automation Percentage of Respondents, n = % 40% 30% 20% 10% 0% Best-In-Class Industry Average Laggard 47% 33% 30% 19% 2.5x 3.6x 13% 13% Version control of Budgets is Able to conduct "what if" scenario automated using enterprise with partial or full automation applications Performance Management Business leaders are challenged to navigate through a highly uncertain environment and react quickly and effectively to change. To succeed, corporate executives (including financial and operational management) must have access to accurate and relevant information to drive better, more strategic business decisions. The ability to measure performance is a vital capability for any organization. The Best-in-Class are 38% more likely to be able to track actual performance against budget than Laggard companies (Figure 14). Leading companies are also 209% more likely to integrate and align sales forecasts to overall business revenue and cost forecasts. Figure 14: Performance Management Capabilities Percentage of Respondents, n = % 80% 60% 40% 20% 0% Best-In-Class Industry Average Laggard 91% 83% 66% 68% 45% 22% Able to track actual performance Ability to integrate and align sales against budget forecasts with overall business revenue and cost forecasts

21 Page 21 Aberdeen Insights Data-Driven Decision-Making Spreadsheets remain the most widely used tool of choice in financial budgeting and planning used uniformly by all companies, regardless of competitive status. Explains Richard W. Herrin, Global Sales, Operations, and Inventory Planning Manager, Tredegar Film Products, companies are not seeking alternative approaches to spreadsheets because of "costs, skill sets, and resources. Aberdeen research indicates that 88% of all companies remain dependent on spreadsheets. They are easy to use and nearly all staff members have some proficiency with them. However, leading companies are going beyond spreadsheets using them as a layer of technology to overlay financial planning and budgeting, and consolidation and reporting tools to dramatically enhance collaborative planning and promote fact-based decision-making. Figure 15: Financial Planning, Budgeting, and Forecasting Technologies Spreadsheets 90% 87% Planning / budgeting / forecasting (stand-alone) application 33% 45% Budgeting and forecasting features of an ERP or other financial application 27% 23% Best-in-Class All Others Financial reporting and consolidation (stand-alone) application 40% 71% Financial reporting and consolidation features of an ERP or other financial application 37% 33% 0% 20% 40% 60% 80% 100% Percentage of Respondents, n = 171 Companies' budget cycle times is often exacerbated by the lack of an integrated view of financial planning and budgeting data, multiple 'versions of the truth,' absence of audit trails all of which makes it even more difficult to move the process along. The use of sophisticated planning and forecasting tools whether present within an ERP system or deployed as a separate capability, is differentiating the Best-in-Class from their peers (Figure 15) and ensuring consistency in data definition and versions for all budgeting and financial planning analysis. continued

22 Page 22 Aberdeen Insights Data-Driven Decision-Making Ongoing business planning is dependent on accurate forecasting. Without comprehensive stress testing and scenario analysis that takes into account a myriad of risk factors, corporations cannot make accurate business forecasts. With standalone spreadsheets it can be nearly impossible to understand the what if impact of actions on various levels of the business. Having the right data and analytics is the foundation upon which organizations need to build dynamic businesses for faster and more accurate decision-making. Top performing companies are integrating the use of Business Intelligence (BI) tools (such as query and reporting, and dashboards / scorecards) into the financial planning process to achieve a higher degree of visibility and access to information (Figure 16). Figure 16: Business Intelligence and Analytics Query and reporting tools 57% 65% Dashboard / scorecard tools 30% 47% Enterprise BI platform 26% 45% Corporate / Enterprise performance management application 21% 32% Event management (triggers and alerts) 17% 30% Data integration tools (including ETL) 17% 29% Data cleansing tools 12% 23% Best-in-Class All Others 0% 10% 20% 30% 40% 50% 60% 70% Percentage of Respondents, n = 171 Leading businesses are further incorporating elements of risk management into the financial planning and budgeting process. Top performing companies are three times as likely to have adopted event management triggers and alerts of exceptions from internal and external sources with indicators such as rapid changes in raw material and component costs, demand volatility, or competitive actions. However, such triggers and alerts still remain relatively low (20%) and elusive to even top performing companies (30%).

23 Page 23 Chapter Three: Required Actions As companies face an unpredictable market, the firms that will be best positioned to navigate evolving market conditions are those companies that build flexible and strong analytical capabilities through the following recommended actions to help drive superior performance: Laggard Steps to Success Adopt standardization and organizational collaboration. The financial planning, budgeting and forecasting processes, systems, and data models must support the dynamic changes in today's business climate. The Best-in-Class are 45% more likely to have standard processes across the organization and 91% more likely to have enterprise-wide collaboration across departments than Laggards. Optimal financial budgeting and forecasting processes require interaction between finance, operation, and business unit managers, coupled with standardization of models, tools, and processes to allow for more agility and organizational information sharing. Invest in financial and forecasting applications that provide flexibility to changing business conditions. Spreadsheet-based budgeting and planning processes are manually intensive, error prone and tend to have longer cycle times. The effort expended in generating budgets and forecasts must be redirected to provide strategic value to help the company make rapid decisions and move quickly in the marketplace. Employ both a top-down and bottom-up approach in the planning and budgeting process. Top performing companies are 28% more likely to use a balanced blend of the two approaches than Laggards. Using the combination of a top-down and bottom-up approach helps to foster a closer link between finance and corporate strategy, ensuring corporate strategic goals are reflected in the plan and that managers who are held accountable have bought into the viability of the plan. Fast Facts The Best-in-Class are 91% more likely have established enterprise-wide collaboration across departments / divisions Top performing companies are 28% more likely to use both top-down and bottomup approach Leading businesses are 37% more likely to link budgeting to compensation Industry Average Steps to Success Link strategic planning to compensation. High-performing companies are 37% more likely to link the budget to the compensation of senior and mid-level management pay. With accountability, companies are able to maximize operational efficiency while reducing errors and costs. Implement processes to provide better insight into future financial indicators and shift reliance away from historicalbased budgeting. Today's unpredictable and fast-paced climate

24 Page 24 demands an adaptive system that is continually updated to reflect variances that arise due to changing business conditions. These include moving away from historical snapshots, developing multiple scenario analysis that demonstrate the risks and rewards of strategic actions, and integrating operational and financial planning processes. Improve time-to-decision by optimizing knowledge management activities. Industry Average companies lag significantly behind top performing businesses in visibility of data to drive successful execution of business strategies. The Best-in-Class are 53% more likely to be able to drill down to successive levels of detail from summary position, and 36% more likely to perform multi-dimensional reporting with roll-ups than Industry Average companies. Best-in-Class Steps to Success Focus on risk mitigation. Companies now face a radically different economic environment. Forecasting models, generally based on previous trends and history, are unable to predict "black swan" or very rare events. Today s economic conditions require diligent attention to detail, interpretation, and analysis that includes the development of thoughtful plans and alternative scenarios, and the adoption of event management triggers and alerts. Improve visibility with business analytic tools. Even the Bestin-Class have yet to fully embrace the technological means to provide greater depth, accuracy, and agility in financial planning and forecasting. Providing visibility through data analytics with the use of dashboards, performance management applications, and business intelligence tools, has shown to be a key competitive differentiator for Best-in-Class firms. Aberdeen Insights Summary In preparing for battle, I have always found that plans are useless but planning is indispensable. ~ Dwight D. Eisenhower At the start of 2010, prospects for the economy remain precarious. But highly effective financial planning, budgeting, and forecasting can effectively inform decision making even in periods of unprecedented change. Dynamic financial planning enabled through five key elements process, organization, knowledge management, technology, and performance management can give business leaders the tools to take prompt action and emerge even stronger.

25 Page 25 Appendix A: Research Methodology In January 2010, Aberdeen examined the use, the experiences, and the intentions of more than 170 companies performing financial planning, budgeting, and forecasting in a diverse set of industries enterprises. The online survey was supplemented with interviews with select survey respondents, gathering additional information on financial planning, budgeting, and forecasting strategies, experiences, and results. Responding enterprises included the following: Job title: The research sample included respondents with the following job titles: C-Level (20%), EVP / SVP / VP /GM (13%), Director (20%), Manager (34%), Staff (6%) and other (6%). Industry: The research sample included respondents from a wide range of industries including service providers (35%), manufacturers (33%), non-profits (8%), wholesales distribution (5%) and others (19%). Geography: The majority of respondents (57%) were from North America. Remaining respondents were from the Asia-Pacific region (13%) and Europe, Middle East, and Africa (30%). Company size: Twenty-five percent (25%) of respondents were from large enterprises (annual revenues above US $1 billion); 36% were from midsize enterprises (annual revenues between $50 million and $1 billion); and 39% of respondents were from small businesses (annual revenues of $50 million or less). Headcount: Twenty-nine percent (29%) of respondents were from large enterprises (headcount greater than 1,000 employees); 28% were from midsize enterprises (headcount between 100 and 999 employees); and 41% of respondents were from small businesses (headcount between 1 and 99 employees); 2% no response. Study Focus Responding executives completed an online survey that included questions designed to determine the following: The degree to which the planning, budgeting, and forecasting process is formalized and automated Current and planned use of technology The ability to perform "what if" scenarios The ability to track actual performance against budget / forecasting, complete with dimensional reporting and appropriate drill-down to detail The level of collaboration and coordination during the planning and budgeting process The study aimed to identify emerging best practices for managing the budget cycle, forecasting, and financial planning and to provide a framework for corporate executives can assess the financial planning and budgeting for their own enterprises.

26 Page 26 Table 4: The PACE Framework Key Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures external forces that impact an organization s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers the key functionality of technology solutions required to support the organization s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management) Table 5: The Competitive Framework Key Overview The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) Practices that represent the average or norm, and result in average industry performance. Laggards (30%) Practices that are significantly behind the average of the industry, and result in below average performance. In the following categories: Process What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization How is your company currently organized to manage and optimize this particular process? Knowledge What visibility do you have into key data and intelligence required to manage this process? Technology What level of automation have you used to support this process? How is this automation integrated and aligned? Performance What do you measure? How frequently? What s your actual performance? Table 6: The Relationship Between PACE and the Competitive Framework PACE and the Competitive Framework How They Interact Aberdeen research indicates that companies that identify the most influential pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions.