Dada Adefolami

By Dada Adefolami

Planning, budgeting and forecasting (PBF) is an underutilized and ineffective process in many organizations and countries. Although the finance ministries and departments should shoulder some of the blame, the cultural attitude of the wider organization needs to change, as do ministries/organizations’ use of technology and data. In developing a corporate budget, a business usually starts with a project plan, then determines the amount of time, goals and costs of the project.
Budgeting, planning and forecasting (BP&F) is a three-step process for determining and detailing an organization’s long-and short-term financial goals. The process is usually managed by an organization’s finance department under the Chief Financial Officer’s. Budgeting and financial forecasting are financial planning techniques that help business personnel in the decision-making process. Budgeting uses estimation to quantify the expectation of revenues a business wants to achieve for a future period, whereas financial forecasting is used to estimate the amount of revenues that will be achieved.
A budget should relate the overall plan in figures. It is different from a forecast in the sense that the plan, and therefore the budget, sets minimum requirements, whereas a forecast is usually an expectation of what is likely to happen.
Markets move more quickly than ever before and are more complex; there is also greater competition. These pressures make the need to forecast more acute. ‘Companies need a much better steer on how external factors are impacting their business and how the decisions organist ion take are impacting performance ‘If organizations would obtain that better steer and translate it into an effective PBF process, they could gain a distinct competitive advantage.
But few organizations seem to recognize this. Although Finance Ministries may accept that PBF is an increasing priority, KPMG study reports a high degree of pessimism around PBF procedures. Almost one in two 46% of those surveyed said their annual budgets were politically agreed numbers, generated from the top of the business and not linked to operational reality. Over 62% said budgets simply reflected a point in time and quickly ceased to be relevant as the financial year went on.
Though that is not how it should be. ‘Within the enterprise, PBF is central,’ pressures. ‘The starting point is having the right enterprise culture. Tone at the top and visible support is critical in integrating and effectively delivering these activities into the business. It has to be a real partnership approach between finance Ministries and the wider organization in ensuring that strategic alignment.’
It is this word ‘strategic’ that is crucial, every organization whether in the public or private sector has objectives. ‘PBF is about turning those objectives into a strategic plan which, in turn, forms the basis of targets,’ ‘these can be used to create in-year budgets so that operationally you can deliver the strategy that fulfils the objectives.’If organizations just roam it is ineffective and inefficient.’ This twisting is often caused by that lack of partnership between finance ministries and the rest of the business.
Forecasting in most organizations tends to be weak because it is done by finance on its own without suitable input from operations, if it is finance-owned and not properly integrated into the wider planning cycle of the business, it is going to fail. The quest is for an integrated model that takes operation’s predictions and monetizes them as part of informing a financial forecast, first organizations have got to take the process seriously. ‘lot of organizations see budgeting as an exercise that must be done’, ‘So, the approach is “What can I get away with?” These problems are cultural, organizational and technical.’

Targets
The ‘what-can-I-get-away-with?’ attitude has wide consequences, especially for the corporate culture surrounding target-setting. The study found that planning and budgeting was often focused around short-term targets and not linked to achieving the strategy over a three- to five-year period. Linking employee incentives to the short rather than the long term, says Lyon, creates the problem of lowballing. ‘Perversely, managers in » business divisions may be able to get away with setting short-term targets that are easily achievable. Do they understand the build-up of revenue and costs and what is possible for the business to achieve?’ This leads to a further question of whether finance has the skills and the capability it needs to challenge during the PBF process. A poor process enterprise-wide leads to sub-optimal decision-making and a strategy that is not aligned to the reality of the delivery. An annual budget is any budget that is prepared for a 12-month period. An annual budget outlines both the income and expenditures that are expected to be received and paid over the coming year. Annual budgets are used by individuals, corporations, governments and various other types of organizations

The study found that organizations are struggling to use data analytics effectively. Over 30% of the financial professionals surveyed said that the quality of the data was the biggest impediment to using data analytics in their planning processes; 17% said that management ignored the data and simply pursued the same decision regardless. Quantity of data is also cited as an issue.

Organization / Ministries need the right data and it needs to be visible,’ unless the propensity to take in all the different data flows internal and external you struggle to understand where your business is heading. Data has to be robust, accurate, timely and visible.’

‘A universal data source of consistent data for strategic plans, budgets, forecasts, situations and actual is a goal that few organizations achieve. The common mistake is a big-data approach, drowning in detail. A more focused view of what is necessary to support decisions works best.’

When all fails, organizations tend to turn to technology to provide a solution, ‘Technology is an enabler but it is not a silver bullet. There is no system out there that you implement and it immediately gives you the answer.’ Instead, says Ministries need to define the strategic planning model, which will in turn define the budget model. Processes, structures and reward mechanisms need to be in place. Then, when an organization has the building blocks, it can start creating a technology specification to make a system investment.
Process
Inaccurate data and technology are intrinsically linked, you are encouraging to base operational decisions on instinct rather than insight, and the distrust is leading to underinvestment in finance technology. From the study 41% said that they haven’t invested in a planning tool other than Excel; and, of those who had, 28% said it hadn’t delivered the benefits expected, setting them back further. Budgeting and forecasting are related, the primary difference between budgeting and forecasting is that one is used to predict the future and the other is used to control expenses. Forecasting uses historical data and scenario analysis to predict the financial situation of anorganization in the future

Organizations need a company-wide holistic technology solution, ‘If it is not joined up, inevitably there are lots of reconciliations between systems and that is an ongoing challenge for finance Ministries.’

But if an organization spends well and on the right technology, it could expect to reap benefits such as real-time reporting and continuous improvement. Finance and Budget/ Planning Ministries should be asking themselves how quickly they can produce their forecasts and how quickly can they change their plans.

Planning and budgeting technology allows finance to provide consistent finance and business data throughout the business in a much more timely and collaborative manner.

Finally
The finance Ministries should step back to see where their organization is in terms of their ability to forecast quickly, gain insight and look forward to see how the business is likely to perform, ‘If not, they will be failing to exploit opportunities. organizations are all about driving Shareholders/shareholder value, and a robust strategic planning process helps day by day year by year to maximize the efficiency and effectiveness of the organization. ‘By performing a strategic planning process, organizations are attempting to reward the planning, budgeting and forecasting. The true purpose of the PBF process is to allocate resources effectively to deliver the business strategy. It supports the business in understanding how its on-going activities contribute to delivering its future longer-term business goals, and enables business decisions to be adjusted in response to changing circumstances.

Planning, Budgeting and Forecasting PBF sits within a performance management framework. The framework has three components. The other two components are Performance Reporting and Profitability and cost analysis.

Organizations should seamlessly link top-down strategic targets to financial and operational forecasts. Performance should be measured against those targets.

Business forecasting methods are used to determine the future development or success of a business regarding its sales, profits, and expenses. In shaky economic times, it is sometimes difficult to create an accurate business forecast for the coming year. However, the following are the forecasting technique

1. Gather your company’s past income statements. Go back several years.
2. Calculate the sales growth rate from year to year. Divide the current sales by the prior year’s sales.
3. Compare the sales growth rates year to year. Plot the sales growth rates using a spreadsheet for visual representation. …

Generally, an annual budget is prepared to determine if the organization is progressing as expected., hence financial forecast is an estimate of future financial outcomes for a company or country for futures and currency markets.

Budgeting will allow you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.

• Dada Suraju Adefolami, Professor of Finance, School of Business Administration, UNEM University Costa Rica, is a Finance / Management Consultant and Certified Forensic Accountant. You can reach him via: [email protected]; 08052043855