In today's fast-changing and uncertain world, leading organizations are creating value by transitioning from traditional financial planning, centered around rigid budgeting and forecasting processes, to more agile and integrated business planning.
What is financial planning?
Financial planning is a set of processes followed by organizations to develop forward-looking financial projections, based on understanding from past performance and insight into what is likely to happen in the future.
Traditional financial planning usually includes the following components:
- A detailed budget prepared at cost center-level for the next fiscal year and often linked to fixed targets, investment / spending limits and incentive schemes.
- Periodic forecasts, prepared at specific times of the year (e.g. each quarter-end), to provide an updated view on the financial performance of the current year.
- A medium- or long-term plan, covering financial projections for the upcoming 3, 5 or 10 years, based on current performance, trends and strategic objectives.
Traditional financial planning is usually steered by Finance, following an iterative approach. The information used combines guidance received from management (top down) and input collected from relevant business teams such as sales, marketing, supply chain, HR, IT, etc. (bottom up).
Why are smart business moving away from traditional financial planning?
Traditional financial planning, including annual budgeting, was first introduced nearly 100 years ago, and is still used by many organizations. However, it has its limitations, especially in volatile, complex and uncertain environments:
Common pitfalls of traditional financial planning include:
- Not integrated (siloed approach) and disconnected from the business
- Very detailed and labor-intensive process
- Elongated cycle time (e.g. 3 to 6 months budget cycle)
- Lack of proper tools (e.g. manual and spreadsheet-based process)
- Political due to close link with spending limits, targets and incentive schemes.
What are leading organizations doing differently?
Leading organizations have understood that in order to remain relevant and create value, financial planning had to evolve, become more agile, integrated and efficient.
In practice, these organizations have implemented a variety of measures:
- Integrate: holistic business planning, involving core business teams, rather than pure financial planning.
- Simplify: less granular and driver-based planning, focusing on business events with significant financial impacts.
- Standardize & centralize: harmonize processes and use shared service centers and/or centers of expertise for administrative parts of financial planning.
- Leverage technology: use market-leading tools to automate tasks, significantly reduce efforts and cycle times and improve data quality and accuracy.
- Replace rigid budget processes: use rolling forecasts and/or event-based forecasting.
- Reduce subjectivity: disconnect budgets and forecasts from targets and incentives.
By implementing such measures, organizations can unlock significant value:
- Time, resources, and money saved
- Improved timeliness and accuracy of forecasts
- Greater performance insights, focusing on what really matters
- Faster and better decision-making to drive the business forward and navigate uncertain times.
Many organizations are still following a traditional approach to financial planning, including rigid and often sub-optimal budgeting and forecasting processes. This traditional approach, however, is ill-suited for volatile, complex and uncertain environments. That is why leading organizations have been rethinking their approach to financial planning, with a focus on agility, integration and efficiency. By doing so, they have been able to unlock significant value and are better prepared to navigate current business environments.