We know that strategic-focused FP&A teams have already switched from traditional financial planning to driver-based budgeting. By using a reporting technique that takes into account their operational performance, companies can create more frequent, realistic, relevant, and useful plans.
Is driver-based planning a priority for you? Consider these three reasons why you should make the move ASAP.
Financial leaders know that high-performing organizations depend on information, not just data, to fuel their insights and drive actionable decisions. Still, as the amount of data that must be managed skyrockets, most CFOs struggle with interpreting it quickly and accurately. Indeed, according to a recent Adaptive Insights CFO Indicator Report, nearly 70% of finance executives said their data is siloed, while 40% admit to being forced to use inaccurate data in their FP&A activities. Even worse? According to the Association of Chartered Certified Accountants, more than 90% of spreadsheets contain serious errors—even though more than 90% of users are convinced that their models are perfect.
This problem isn’t going away any time soon. In fact, 59% of CFOs say the amount of data they have to manage will increase by up to 50% in the next five years. The sheer proliferation of information leads to what we call data debates, which waste time and cloud leaders’ overall strategic vision.
Luckily, driver-based corporate budgeting fixes this thorny issue by creating a common set of numbers that is agreed upon by people across all business units. By carefully defining your drivers around what is important to your business, you’re establishing priorities and creating an efficient system. This single source of truth helps reduce the mess of spreadsheets while also eliminating conflict around data so that the finance team can finally move beyond merely acting as financial police officers. By establishing a shared language with the rest of the company, FP&A leaders can shift attention to the critical job of generating insight, strategy, and action instead of getting stuck debating accountability and accuracy.
So how do you get started? Take a look at all of the GL accounts that make up your financial statements, starting with your P&L. Assess what is driving your top line and operating expenses. Most companies are able to pick 10 or so accounts that impact 80-90% of the P&L. Start with creating drivers based on these and let the rest of the accounts become a function of the most important accounts.
No company ever makes or misses a quarter because of office supplies, so instead of taking time planning that account, make it a driver-based account of, say, dollars per headcount. Then, as headcount fluctuates, so does the budget for office supplies. By putting in time understanding the business and creating a driver-based approach, you will reap a great time reward every forecast cycle. You will stop having mindless conversations with your business partners that yield nothing, and start having more strategic, focused discussions that actually drive results in your business.
Traditional, static planning is obsessed with the past, which doesn’t do anyone much good. By looking to past performance and understanding the numbers, finance managers seek to compare previous results against current expectations. The problem? That strategy means that even the most current forecasts are always looking backwards, and were often pinpointed a year ago. They’re never based on more than best guesses or assumptions, and they become almost instantly irrelevant.
But CFOs who use driver-based budgeting can avoid this fate by injecting their plans with greater insight into business performance. By creating an active planning system that champions real-time information and bypasses manual reporting processes, CFOs can ensure that accurate, up-to-date information is immediately available, which helps their teams create the forward-looking, strategic insight that the CEO so desperately needs.
Active planning’s core is having multiple data points that allow a finance team to think more strategically by focusing on an array of data points, sensitivity analysis, and multiple what-if scenarios. By using a solution like the Adaptive Suite, a finance team’s time is dedicated more to strategic thinking and less on spreadsheet babysitting.
Many FP&A teams are used to a grim reality: Despite late nights around close and constant efforts to collect numbers from the rest of the business, their forecasts still wind up being dead wrong. Just one percent of companies achieve 90% forecast accuracy 30 days out. According to Adaptive Insights’ CFO Indicator Report Q2 2016, just one in four CFOs met their sales forecasts and 16% of those who missed were off by 6% or more. That makes the thinking finance team member wonder: Why did we even bother?
A better way to handle forecasting is to continually update a variety of “best,” “worst,” and “most likely” scenarios. Of course, doing so becomes a giant time suck if you’re still toggling around in spreadsheets. But by using a system like Adaptive OfficeConnect, which connects your Excel to a cloud-based planning system, you can easily develop presentation-quality reporting that is always based on the latest and most accurate data. You can execute intricate reports that focus on dozens or hundreds of financial and operational KPIs across even the largest and most complex businesses.
Strategic CFOs plan for an array of alternative outcomes based on a constantly updated version of the single source of truth. Doing so allows stakeholders to better understand what might happen if key assumptions are missed or exceeded. Finance teams can seamlessly maintain both a high-revenue and low-revenue set of scenarios, as well as complex scenarios that include a variety of propositions (“What if we invest in this new business and demand for one of our products decreases?”); and ones that are impacted by actions that might be delayed for six months to a year, like an acquisition.
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