Planning, Budgeting, and Forecasting are crucial components of a company’s performance management and key responsibilities of your executive finance department. These processes are generally combined into one, in which each component represents a step towards a successful financial strategy. You will need to create an insightful financial plan to establish accessible, company-befitting short-term, and long-term goals.
The first step of this 3-step process is planning. Planning produces a framework for 5-year business objectives or 3-year objectives if you are operating in an unstable industry. Budgeting, which typically comes straight after, requires deciding on precise, detailed spending allowances. These decisions are made based on the company’s revenue, expenditure, cash flow, and debt reduction data. Therefore, as this information changes during the fiscal year, the budget itself will need to be adjusted. Forecasting, the final step of traditional fiscal planning, uses existent data regarding an economy’s market conditions and guiding forces to predict the revenue a company is expected to make over a set period. Like budgets, forecasts will frequently need to be changed per newly discovered data or evolving factors.
Why Companies Need Effective Planning, Budgeting, And Forecasting
A company with strong planning, budgeting, and forecasting is more likely to obtain peak-accuracy financial analytics, which will serve as a tremendous competitive advantage against other companies in its industry. The more accurate your reports and analyses, the more efficiently your company is likely to perform, which in turn is almost guaranteed to bring in increased returns. In this economic time of market disruptions and shifting trends – even in the most traditional industries – effective financial planning has become primordial to avoiding falling behind new competitors. A case study on the Basin Electric Power Cooperative has shown that companies welcoming the practices of data analytics and precise planning and forecasting improve their ability to make strategic fiscal decisions. These practices will generally save on time and minimize errors, as well as nurture a collaborative, disciplined work environment.
The most common benefits of sound planning, budgeting, and forecasting include the following:
- Facilitated identification and analysis of market changes and their real-time impacts
- Possible plan and forecast adjustments in response to market changes (increased risks/new opportunities) as they occur
- Stronger relationships between financial and operational strategies
- Accurate cash-flow predictions
- Greater cohesion between plan contributors in daily operational activities
- Greater focus on company growth when establishing long-term budgets
- Increased returns on company investments based on more strategic fiscal decisions
- Easier employee performance tracking (against sales pipelines)
- Creation of robust company trajectory assessment for potential investors or lenders based on reliable analysis
History And Evolution Of Modern Fiscal Planning Processes
Before you establish your financial strategy, you may want to consider the adjacent planning practices that will project your company into the already existent economic future. Practices such as supply chain planning, sales planning, workforce planning, and marketing planning are still considered relatively new. Yet, they are the product of a century of trial-and-error using our current globally-used financial planning method. This method is itself the result of various economic events and observed practices dating back as far as the 1400s, however, it is not until the Great Depression that it became fiscal planning as we know it.
Current accounting practices are generally linked back to the Asian-Venetian trade of the 15th century when the first “accountants” began to use double-entry bookkeeping, and creating and filing income statements and balance sheets. Initially, the word “budget” was merely an anglo-accented use of the French term “bougette,” which referred to a “small purse,” usually containing the coins used for household expenditure.
The 1930’s economic catastrophe single-handedly created the need for a new accounting practice: forecasting. This new practice aimed to minimize the company’s chances of unexpected losses, and allow it to adapt to upcoming market changes. Consulting firms began to emerge soon after the Great Depression, offering fiscal analysis services that offered the revolutionary prediction tools of forecasting to companies and small businesses nationwide. However, these practices were relatively challenging to carry out before the invention of computers, as errors were frequently occurring, paper trails were lost, and files were damaged by poor storing.
Mainframe computers emerged in the 1960s, facilitating the bookkeeping processes for accountants worldwide. In the 1980s, personal computers changed the landscape for traditional accounting with software like Microsoft Excel, which remained until the late 1990’s the go-to financial reporting solutions. But spreadsheets are no longer efficient accounting tools on their own. Companies are now using their new access to (almost) infinite data sources and information outside of market force control (weather, social trends, and adjacent econometrics) to create more accurate fiscal plans. If your company is still depending on this outdated system, you may want to read up on reasons you should stop using excel for financial data analysis.
Technology has not only disrupted financial planning as we know it: it has also greatly improved it. Planning, budgeting, and forecasting have become faster and more accessible than ever with the availability of many software packages designed to handle complex data more efficiently than any prior systems. These packages provide predictive insight that could enable your company to establish strategies with almost as much awareness of future market performances as of past performance data. These “cloud-based” financial systems have become a necessity for desirable fiscal returns because they save money on wages and consultancy fees, provide more secure containment of data, and are more flexible to company needs.
However, some companies, predominantly small-to-midsize firms, have been reported to still “strongly rely” on traditional spreadsheet systems. Only one in ten has already made the permanent move to the more comprehensive, modern approach, according to a recent Ventana Research study. The reluctance to shift to this system of planning, budgeting and forecasting usually stem from the following:
- Fear of additional costs in purchasing software packages and hiring experts
- The assumption that the consideration of more factors in forecasting will lead to more complex data
- The frequent disparity between the training of experienced accountants and the current technology
- Mistrust of the “cloud” as a source of corrupted data and a possible cyber-security target.
If you are uncertain whether to move to a cloud-based approach, you are not alone. However, the efficiency of the modern financial planning method has been proven by the success of some of its most common users: Google, Apple, and the vast majority of market leaders in all industries.
How Technology Has Improved The Finance Department
The use of advanced software solutions facilitates the planning, budgeting, and forecasting processes substantially. They are easy to obtain, usually sold off-the-shelf, or as a component of a fully integrated corporate performance management solution. The incorporation of advanced software in your fiscal operations will enable your company to:
- Assess company performance through accessible interfaces providing infographics and other visualizations
- Use detailed, wide-spanning data to establish the root causes of company performance changes
- Automatically create reliable predictions on company performance using internal data, market trends and other relevant factors
- Create insightful data-modeling scenarios to anticipate unexpected market shifts or internal occurrences.
- Experience greater participation in operational practices by key company contributors
Innovation in the finance function has proposed solutions that tackle the entire planning cycle with instantaneous data collection, accurate modeling, sharp analytics, and reliable reporting. These solutions require minimal infrastructure adjustments and can manage a plethora of business functions. Companies that operate in retail environments, for example, can particularly benefit from tools such as predictive analytics and supply chain planning, which will facilitate the management of its stock-keeping units.
If you are struggling with the idea of a cloud-based service, in particular, you will be pleased to find that technology is no longer exclusive; cloud-mimicking solutions operating on a solely on-premise system are now widely available. Your software can be entirely self-sufficient, depending on the solution you choose, but operate with greater flexibility, agility, and accuracy than traditional financial planning methods.
How eCapital Advisors Will Help You With Planning, Budgeting, and Forecasting
Autonomous financial planning can seem intimidating, which understandably leads many to seek out a business partner for budgeting. However, professional help is readily available to simplify even more overwhelming processes. Your eCapital Advisor’s consultant will collaborate with you closely, using state-of-the-art integrated software to carry out your assessments and report to you with detail and precision. eCapital Advisors consultants are field leaders trained and dedicated to solving your financial planning problems using analytics guaranteed to help you make more strategic business decisions.
Our experts will provide your company with advisory services comprising an analytics roadmap creation, improvement of your current financial processes, software use instruction, business intelligence, data cleansing, budgeting, planning and modeling, and precise financial consolidation and reporting and many more, depending on your package needs.
A Concluding Note Regarding Effective Planning, Budgeting and Forecasting
Your company’s financial success is almost entirely dependent on your ability to establish how it must operate as a trading entity in our modern economy and society. The efficiency of your financial planning will depend on the affinity of your finance department with modern planning, budgeting, and forecasting techniques. If you are still uncertain of the necessity of a modern approach to your company’s accounting, you may want to consider this Smiths Medical case study, which attests to the positive influence of practices mentioned above on company performance.
If a lack of accountancy or software expertise is currently standing in between your company and effective financial planning, contact us today. eCapital Advisors is looking forward to taking your business to 21st-century fiscal efficiency.
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