MA4 Value adding budgeting and forecasting

Transcription

1 MA4 Value adding budgeting and forecasting Stuart Bilbrough CA CFO Radius Care Ltd Consider this: The Oxford Martin Institute has forecast that of the 702 occupations in the United States 47% of jobs could be automated within 20 years. Source: The Future of Employment: How Susceptible are jobs to Computerisation? C. B Frey and A. A. Osborne 17/09/2013, Oxford Martin Institute. 2 1

2 0.3% Source: The Future of Employment: How Susceptible are jobs to Computerisation? C. B Frey and A. A. Osborne 17/09/2013, Oxford Martin Institute % Source: The Future of Employment: How Susceptible are jobs to Computerisation? C. B Frey and A. A. Osborne 17/09/2013, Oxford Martin Institute. 4 2

3 94.0% Source: The Future of Employment: How Susceptible are jobs to Computerisation? C. B Frey and A. A. Osborne 17/09/2013, Oxford Martin Institute % Source: The Future of Employment: How Susceptible are jobs to Computerisation? C. B Frey and A. A. Osborne 17/09/2013, Oxford Martin Institute. 6 3

4 Adding value using historical data tends to provide reactive solutions. Adding value during the budgeting and forecasting processes provides proactive value adding opportunities. This session explains how Finance is instrumental in linking an organisation s strategic plan to its financial reality. 7 Steps for Lifting a Finance Function Skill Set Towards Adding Value. Validation and Control Stakeholder Management Financial & Non-Financial Analytics 8 4

5 9 Today we will cover: 1. How to add value to the business Finance supports through the budgeting and forecast processes, and 2. What to do when strategic expectations do not meet financial reality how to close the earnings gaps and reduce future financial risk. 10 5

6 Why Budget and Forecast? How a company budgets and forecasts is critical to the success of any organisation. It provides the Strategic Plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO/Managing Director and the Board of Directors to set financial targets for the organisation. 11 Why Budget and Forecast? The budget and forecast are the most common form of financial planning in a company. Typically the budget is completed annually and the rolling and reforecasts recalibrations through the year. Financial planning also includes capital evaluations, cost management exercises, product development and funding plans. 12 6

7 Budgeting is an unnecessary evil - Dr. Jan Wallander, Honorary President, Svenska Handelsbanken Source: 13 The budget is the bane of corporate America - Jack Welch, ex-ceo, General Electric Source:

8 The budget is a tool of repression rather than innovation - Bob Lutz, ex-coo, Chrysler Source: 15 Benefits of Budgeting 1 Control is possible when a budget line is the responsibility of an individual Source: Susan Hansen, Simply Finance An essential guide to Finance for non-financial managers, pg. 113 to 115, David Bateman Publishing. 16 8

9 Benefits of Budgeting 1 Control is possible when a budget line is the responsibility of an individual 2 Performance can be measured a benchmark for actual performance verses expectations including the use of KPI % Source: Susan Hansen, Simply Finance An essential guide to Finance for non-financial managers, pg. 113 to 115, David Bateman Publishing. 17 Benefits of Budgeting 1 Control is possible when a budget line is the responsibility of an individual 2 Performance can be measured a benchmark for actual performance verses expectations including the use of KPI % 3 Quality of planning is enhanced Forces consideration for the future including stress testing through sensitivity analysis Source: Susan Hansen, Simply Finance An essential guide to Finance for non-financial managers, pg. 113 to 115, David Bateman Publishing. 18 9

10 Benefits of Budgeting 1 Control is possible when a budget line is the responsibility of an individual 2 Performance can be measured a benchmark for actual performance verses expectations including the use of KPI % 3 Quality of planning is enhanced Forces consideration for the future including stress testing through sensitivity analysis 4 Management by exception Enables the focus by management on the problem areas Source: Susan Hansen, Simply Finance An essential guide to Finance for non-financial managers, pg. 113 to 115, David Bateman Publishing. 19 Benefits of Budgeting 1 Control is possible when a budget line is the responsibility of an individual 2 Performance can be measured a benchmark for actual performance verses expectations including the use of KPI % 3 Quality of planning is enhanced Forces consideration for the future including stress testing through sensitivity analysis 4 Management by exception Enables the focus by management on the problem areas 5 Goal orientation Can serve as a motivator for employee productivity Source: Susan Hansen, Simply Finance An essential guide to Finance for non-financial managers, pg. 113 to 115, David Bateman Publishing

11 What is adding value? Value is best defined by the Collins Dictionary as, among other things; the desirability desirability of something, often in terms ofusefulness usefulness and exchangeability exchangeable and to be valued is defined as to hold (someone or something) in high regard. Find out more on this subject here: 21 Adding value when budgeting and forecasting 1. An Efficient Process Whether it is the annual budget, quarterly reforecast or adhoc capital evaluation projects, it is critical that the process in place is efficient and inclusive. In many organisations the financial planning process dominates through inefficiency and the lack of recognition of materiality. It is important that Finance spends more time working with a business then budgeting it. Source:

12 Adding value when budgeting and forecasting 2. Help Decision Makers Understand the Numbers It is critically important to ensure that the key decision makers in an organisation understand the outcomes from a financial plan. Not all business unit owners are strong financially. Finance should assist where possible in ensuring that financial management is understood. This includes support functions like HR and marketing.. Source:

13 Adding value when budgeting and forecasting 3. Identifying Opportunities to Improve Product or Service Revenue This includes identifying new revenue making opportunities and stopping those that are unprofitable. External and internal benchmarking is a quick and effective way of identifying these opportunities. Source: 25 Adding value when budgeting and forecasting 4. Identify Cost Management Opportunities This is identifying suboptimal spending and stopping it. This is not cost cutting. Like with revenue internal benchmarking is a very effective way of identifying suboptimal spending through comparison with best practice. Source:

14 Adding value when budgeting and forecasting 5. Leading by Example Ensuring a Finance function leads by example in containing costs and keeping to budget commitments. Finance s recommendations to minimise other department costs will lose some credibility if they can t manage their own! Source: 27 Adding value when budgeting and forecasting 6. Keeping Tabs on Current Year Objectives Finances involvement in the strategic planning process assists in ensuring objectives build up to the financial expectations. Finance can keep a tab on objectives and push along opportunities. Through a monthly rolling forecast any delay in the objectives and resulting gap to earnings expectations can be highlighted for immediate resolution. Source:

15 Adding value when budgeting and forecasting 7. Proactively completing post business care reviews This is going the extra mile post completion of business case development, product development or cost management initiatives, as examples. Evaluate how good the outcomes and how good the decision making were. What can be learnt for the next financial planning exercise. Source: 29 Adding value when budgeting and forecasting 8. Cash is King, Pre-empt Short and Long Term Funding Needs Even before an organisation funding requirements are needed or in fact known, it is important to ensure where it can be accessed. Many opportunities requiring financial planning have a funding need therefore Finance knowing where that will come from is critical to seizing opportunities as they arise. Source:

16 Adding value when budgeting and forecasting 9. Best bang for the buck Ranking impending capital projects and/or product developments and ensuring those with the best return on investment is prioritised. Keep a list of opportunities that miss the cut. They can be started should a better-thanforecast year eventuate. Source: 31 Adding value when budgeting and forecasting 10. When strategic expectations do not equal financial reality Recommend ways to close the gaps this may require the re-engagement of stakeholders used in the financial planning process. Finance may be able to assist in providing cost reduction opportunities, sensitivity analysis or running different scenarios, revenue benchmarking, etc. to assist in the decision process and in closing the profit gap. Source:

17 Adding value when budgeting and forecasting 10 Point Checklist for Adding Value 33 When expectations do not equal reality 34 17

18 When expectations do not equal reality To Consider: Solutions not Problems 1 Do something about it! Unresolved gaps are a risk to the business. 35 When expectations do not equal reality To Consider: Solutions not Problems 1 Do something about it! Unresolved gaps are a risk to the business. 2 Look at options to provide a solution BEFORE engaging the business unit manager or applicable decision maker

19 When expectations do not equal reality To Consider: Solutions not Problems 1 Do something about it! Unresolved gaps are a risk to the business. 2 Look at options to provide a solution BEFORE engaging the business unit manager or applicable decision maker. 3 Consider under-promise and over-deliver sharks. This can be as big an issue as over-promise and under-deliver. 37 When expectations do not equal reality To Consider: Solutions not Problems 1 Do something about it! Unresolved gaps are a risk to the business. 2 Look at options to provide a solution BEFORE engaging the business unit manager or applicable decision maker. 3 Consider under-promise and over-deliver sharks. This can be as big an issue as over-promise and under-deliver. 4 Consider where financial realities change through external pressures. This may require an update to strategy

20 When expectations do not equal reality To Consider: Solutions not Problems 1 Do something about it! Unresolved gaps are a risk to the business. 2 Look at options to provide a solution BEFORE engaging the business unit manager or applicable decision maker. 3 Consider under-promise and over-deliver sharks. This can be as big an issue as over-promise and under-deliver. 4 Consider where financial realities change through external pressures. This may require an update to strategy. 5 Consider materiality. Validation and Control 39 When expectations do not equal reality To Consider: Solutions not Problems 6 Highlight issues as early as possible so they can be resolved

21 When expectations do not equal reality To Consider: Solutions not Problems 6 Highlight issues as early as possible so they can be resolved. 7 Positively engage key decision makers when gaps are identified to work together for an agreed resolution. Stakeholder Management 41 When expectations do not equal reality To Consider: Solutions not Problems 6 Highlight issues as early as possible so they can be resolved. 7 Positively engage key decision makers when gaps are identified to work together for an agreed resolution. 8 Ensure there is an escalation avenue in place for when there is issue closing a gap between strategy and the financial plan

22 When expectations do not equal reality To Consider: Solutions not Problems 6 Highlight issues as early as possible so they can be resolved. 7 Positively engage key decision makers when gaps are identified to work together for an agreed resolution. 8 Ensure there is an escalation avenue in place for when there is issue closing a gap between strategy and the financial plan. 9 Document fully any changes to a financial plan. Version control is critical. 43 When expectations do not equal reality To Consider: Solutions not Problems 6 Highlight issues as early as possible so they can be resolved. 7 Positively engage key decision makers when gaps are identified to work together for an agreed resolution. 8 Ensure there is an escalation avenue in place for when there is issue closing a gap between strategy and the financial plan. 9 Document fully any changes to a financial plan. Version control is critical. 10 Finance plays a key role in coordinating the closure of any gap. Finance does not force the closure

23 Take Away Today 45 Take Away Today a. 94% 46 23

24 Take Away Today a. 94% b. Adding value using historical data tends to provide reactive solutions. Adding value during the financial planning process provides proactive value adding opportunities. 47 Take Away Today a. 94% b. Adding value using historical data tends to provide reactive solutions. Adding value during the financial planning process provides proactive value adding opportunities. c. Remember the 10 Point Checklist for Adding Value 48 24

25 Take Away Today The key points and diagrams in this session are from the book, Bean Soup Beyond Bean Counting Steps for Lifting a Finance Function Skill Set Towards Adding Value. You can find out more about the book at 49 Value-adding budgeting and forecasting Stuart Bilbrough CA 2013 Stuart Bilbrough, Finance Mechanics Limited. All rights reserved. There are terms and methodology developed in this presentation that is the intellectual property of Stuart Bilbrough, Finance Mechanics Limited. Any use of this material without the written permission of the author is strictly prohibited