Breakback Driver based top-down forecast

Edgar R. Fiedler was an American economist who served as Assistant Secretary to the Treasury between the years 1971-75. Edgar published a series of essays during the late 70’s and early 80’s once pithily stating “If you have to forecast, forecast often” something that seems especially relevant as we navigate the current economic climate of 2020.       

As businesses of all shapes and sizes come to terms with the impact of the COVID-19 pandemic, executives and finance professionals continue to adapt to the changing landscape, turning to re-forecasting and scenario planning to help better predict what might be in store for the remainder of 2020 and beyond.  

However, many organizations are finding out they are not as prepared as they should be, and do not have the right forecasting and reporting tools in place to support effective decision making during this difficult period.

Here’s the Problem with Planning Budgeting and Forecasting

 

Forecasting at the best of times is a tough process. No one said it was easy predicting the future.

You will often hear organizations acknowledge inefficiencies around the whole budgeting and forecasting process, with many companies admitting they’ve put up with system limitations for far too long – inflexibility, no real time data, poor collaboration and lack of security are often cited. 

While sub optimal, these challenges may have been at least manageable in a pre COVID-19 world, with organizations able to ‘make do’ with what they have, but today’s heightened environment is shining a light onto these legacy systems that typically rely on a complex web of Microsoft Excel based forms that are no longer fit for purpose.

It’s becoming clear that these budgeting and forecasting bottlenecks are now taking a front row seat and will only serve to hinder an executive’s ability to plot a way forward. Lots of finance teams realize that plans to modernize inhouse budgeting and forecasting tools can no longer be kicked into the long grass.

 

Breakback Driver based top-down forecast

Top Five Planning Essentials in 2020 

So, what exactly do companies have on their budget planning tools wish list in today’s world? Many finance professionals are anxious and frustrated as they attempt to re-forecast and plan during these uncertain times. 

Here are five key takeaways, in no particular order, captured during recent conversations with finance professionals from a multitude of industries to help improve your planning, budgeting and forecasting methods. 

Historical Actuals 

Finance teams need actuals to reside in one secure, central location and they tell us this should be in the Cloud. It needs to ‘just happen’ and update in the background on a scheduled basis. 

 

The jury’s decision is unanimous – manual exporting into Excel coupled with the necessary data manipulation and formatting just won’t cut it in today’s world. It takes way too long and is greatly adding to frustration levels as executives continually push finance teams for accurate and meaningful data. A fully featured, structured data warehouse that may have once been viewed as a ‘nice to have’ has now become essential for effective organizational wide forecasting and budgeting.  

Multiple Versions & Scenarios 

 

High on the list is a renewed focus on the need to easily create and manage multiple forecasts and budget versions for analysis. Right now, scenario planning is crucial. The need to quickly run what-if analysis across a variety of different business scenarios has become an absolute necessity. It goes without saying that organizations need this to be on-demand, flexible and fully self-service.

 

Driver Based Forecasting

 

Speed and accuracy are vital to the planning process. Most organizations are familiar with the concept of driver-based forecasting, but quite often you will see a form of this deployed using traditional Excel. The following short video illustrates why companies are talking about the need for enhanced driver-based forecasting and budgeting. 

Stakeholder Ownership 

 

The planning, budgeting and forecasting process has to be a partnership between business managers and finance. Too many finance teams tell us they carry too much of the burden when it comes to the planning process, yet it is difficult to adapt when companies are using traditional Excel models. To encourage wider budget ownership, we are seeing key requirements focused around a need for trackable assignments, automated workflow with review and approval functionality, coupled with a desire for real time updates and easy consolidation at the organizational level.  

Cloud Budgeting 

 

This will come as no surprise to anyone, but you won’t find many companies out there without a clearly defined Cloud strategy, and it’s safe to say that this includes forecasting and budgeting systems. Companies with traditional system deployments are now finding themselves fast-tracking cloud services due to the advent of increased remote working. Giving business managers faster and more reliable web-based access to centralized budgeting and forecasting assignments further supports the goal of wider stakeholder ownership, security, and auditability. 

 

Does your Team Really Have the Correct Budgeting & Forecasting Tools? 

Many organizations are using this time to evaluate Corporate Performance Management software as an efficient budgeting and forecasting tool. Yes, it’s another acronym into the mix, but if ever there were a finance technology category appropriate for these times, CPM could certainly make a strong play for the top spot. 

 

Profit & Loss

This article explores the popular Dynamics 365 Business Central cloud ERP system and how you can achieve advanced reporting and budgeting.
After Microsoft’s highly anticipated release of Dynamics 365 Business Central (D365 BC) a few years ago companies evaluating the solution has, as expected, quickly zoomed in on reporting, budgeting and business intelligence (BI) capabilities.

But, let’s zoom out for a moment…after 25 years in the software industry, I have yet to see an ERP system with fantastic reporting, budgeting and BI capabilities built into the ERP. Alas, the world’s most used tool in this area remains the ever popular Microsoft Excel spreadsheet! There is actually a good reason for ERPs failing in this area with their native functionality, and that is that the demands for advanced calculations and formatting, currency conversion, consolidations, budget workflow, custom budget input forms, and charts simply are too much for the otherwise controlled and accounting-focused ERP applications. That is also a main reason why there is a flourishing corporate performance management (CPM) and BI industry out there that plugs these and other planning and decision-making related holes in ERP systems. It has become a symbiotic relationship in many ways with a sometimes elegant dance, especially when there are solid integrations that exist between ERPs, CPM solutions, and BI tools.

So, where does Dynamics 365 Business Central (D365 BC) land in terms of advanced reporting and budgeting? Well, as expected, it has native reporting and budgeting at the typical level where most modern ERPs have it. So…if ERP history is any indication, that means that 90-95% of all D365 BC customers will at least partially be using their beloved Excel spreadsheets for some of their reporting and a lot of their budgeting and forecasting. That is, unless they are ready to step up the CPM game and look at CPM tools like Solver for full blown cloud budgeting, reporting and consolidations that are pre-integrated and also running on Microsoft Azure as a multi-tenant solution.

But wait a minute, that was CPM, but what about BI? Actually, here Microsoft seems to have achieved a home-run in the past few years with Power BI. Not only did Power BI recently become the leader in the Gartner BI Quadrant, but Microsoft has done an excellent job integrating it to D365 BC and many other transaction systems.

So, if you work for an organization that plans to evaluate Dynamics 365 Business Central, between Power BI from Microsoft and advanced CPM solutions like Solver, you should be in good shape to turbo-charge your organization’s decision-making abilities in the years ahead.

Good luck and enjoy your ERP, BI, and CPM journey!

Solver enables world-class decisions with the Solver cloud based CPM suite made up of budgeting, reporting, dashboards, and data warehousing, delivered through a web portal. Solver is reinventing CPM with its next generation user-friendly solution. Solver empowers business users with modern features including innovative use of cloud-connected Excel in the report and budget form design process. If you’re interested in learning more, our team is excited to hear about your organizational needs and goals.

Workforce Planning

One of the most significant changes to businesses during COVID-19 has been  the large-scale work-from-home policies that almost all companies implemented. While some businesses may have partially or fully practiced this for a few years already, it has never in the history of the world been at this level. 

As many business owners are eager to get their staff back in the office, they may find that a majority of their team members have enjoyed their newfound freedom of working from home with zero commute time and no travel costs.

Some companies have already announced that they will be completely work-from-home going forward. Some employees may switch companies to find a more flexible employer if pressure to show up in the office five days a week is too high. 

Chances are that the remote work trend that was accelerated by COVID-19 will not fade away. There will be other trends that will continue to shape work-from-home habits such as:

  • Virtual reality technology
  • Video and collaboration technology (Teams, Slack, Zoom, etc.)
  • Longer commute times due to re-emerging traffic congestion
  • Hassle of all the new “cleanliness rules” when coming into the office
  • Real estate prices driving workers to live further away from work  
  • Commercial real estate prices and parking rates
  • Security concerns as home internet often is less secure than being in office 

If work-from-home is becoming the new normal for many organizations, a number of new questions arise including: 

  • How do companies assure that their team members are as- or more efficient as they were when working at the office? 
  • How do managers operate when they rarely ever meet their team members other than virtually on video calls?

Let’s take a closer look at both of these important items.

Efficient Workforce Planning Strategies and KPIs

Increasingly, executives are doubling down on two-way transparency. In other ways, the sharing of how you are doing as a company and how each team member is performing against agreed upon goals. In order for this to work, employ performance-based compensation plans and processes. 

Next, tools must be implemented to track metrics and provide reports. Imagine dashboards and scorecards with personal KPIs  and traffic lights. This is the recommended approach according to many management gurus.  Use top down sharing of strategies and goals that support the KPIs, broken down from company to department to individuals. Then, as results come in, bottom-up sharing of how team members as well as departments performed versus goals. 

Specifically, with likely strong growth in work-from-home trends, executives are already pondering how to ensure that employees are engaged, efficient and goal driven as they conduct their work from their bedroom or living room. With limited oversight and old-school micromanagement quickly fading, personal KPIs for work are rapidly growing in popularity. However, setting the best possible goals for employee KPIs can be a bit of science in itself.

Often attributed to the management guru, Peter Drucker, and first used by George T. Doran in 1981, the acronym, SMART, is used to guide goal setting.  Here is an overview of SMART goals: 

  • Specific – simple, sensible, significant
  • Measurable – meaningful, motivating
  • Achievable – agreed, attainable
  • Relevant – reasonable, realistic and resourced, results-based

In the years ahead, organizations both in public and private sector, will increasingly explore and try out individual KPIs, and those that are most successful with it are better equipped to build thriving organizations that are “future proof”. 

Key Elements of Remote Workforce Planning 

Managing and growing employees successfully has always been an area that can put a company ahead of its competitors. Companies spend money on benefits, training, education, and compensation plans to improve their staff. However, organizations promote from within, without experience, and do not train the new managers. This was a failing process and the future will require better managers with a higher percentage of employees working from home.

Define Job Descriptions 

The starting point is the most important. For each position, a manager needs a job description with the six to eight main responsibilities of the role along with the KPIs that will be set each year. Define what makes a successful candidate and a candidate that would fail in the role. Each employee receives this document from the manager and then the manager reviews it in a meeting to ensure both understand the expectations.

There are many ways of coming up with the main roles and responsibilities of the position. Interview people currently in the role, research online, talk to the HR department, and discuss with other managers. Keep the list of responsibilities concise, but include details. The more details around each role will enable the employee to understand the role and improve their chances of success.

Pinpoint the KPIs that will Define the Role.

The manager should explain how he/she will measure each KPI in the role and what is a success or a failure. Describe where the data comes from and how the KPI is calculated. Then sit with the employee and document what the goals for each KPI by a specific period will be. Ensure that the employee is onboard and agrees that they can achieve their goals. If numbers are set that they do not believe in, then you may lose the employee early on in the process.

Review and Finalize the KPIs 

Historically, managers would have an annual review that tried to encapsulate what happened over the year, but typically only highlighted the last few months as that is all that most remember. In a year like 2020, it becomes even more difficult with the rapid shift to remote work. 

Start now – meet with the employee monthly, show the KPI goal, the results to date, and a variance. Include a traffic light on each KPI to show whether the employee is succeeding (green), failing (red), or in the middle (yellow). For all yellow and red items document action items that the employee needs to do to improve upon those that are below the goal. 

Now, when you meet, the manager simply reviews the numbers and the prior action items. Many of the work from home efficiency concerns go away and it is all about productivity.  Below is an example of a simple scorecard for a manager to review with a consultant that includes actual data, the goal, variance with traffic lights, and goals for the next four quarters.

Screen Shot 2020-06-03 at 1.03.39 PM

By doing this across the board, the culture changes to become a highly productive workforce. Good employees want to work with other good employees. This culture helps build a profitable company with high growth. Terminate the employees that regularly do not meet their goals, but in a way that is clear from day one. 

 

Benefits of Automated Workforce Planning Software and KPI Management

Whether your KPIs and workforce planning requirements are simple enough to be handled in Excel or currently using a modern planning and budgeting tool, now may be a good time to think about ways to combine budgeting, workforce planning, reporting and KPI management into a single solution. 

So, whether caused by an unfortunate virus outbreak or technology trends affecting your industry, having effective workforce planning tools and plans to be ready for a reforecast is always going to reduce stress and blood pressure for the organization’s management team. 

Example of an automated statistical forecast

At the core of every business strategy for products and services is to provide optimal management of the supply chain. A leak or inefficiency in the supply chain eats away at the organization’s bottom line. Supply chains are becoming more complex with more variations in products, distribution channels, and material planning. Accurate supply and demand planning are essential for optimal productivity and profitability. 

How does a business obtain an optimal supply chain? It comes down to how well an organization can develop a demand plan. Demand is never linear and rarely easy to predict. A planning team needs to have the right historical data that can be used to create a statistical forecast, achieve consensus from the stakeholders, and be quick to pivot on changing internal or external market trends. In this article, we seek to define and discuss the elements of demand planning, analyze the cost of failure, and outline the steps to success.

What is Demand Planning?

Demand planning is a multi-step process to forecast demand, improve accuracy of forecasts, and align inventory with peaks and troughs of demand. In other words, demand planning is the process of forecasting demand for a product or service. 

Successful demand planning is defined by having the right balance of inventory levels to meet customer needs while minimizing inventory surplus or deficiency. 

Here are the four crucial aspects of demand planning in order of importance: 

  • Product Portfolio Management – Product portfolio management oversees the entire product lifecycle. It starts with the introduction of a new product to the eventual end of its product life cycle. Upkeep and maintenance of product data is key to statistical forecasting.
  • Statistical Forecasting – Build a forecast with past inventory data, sales data, and appropriate product history to predict future data or trends.
  • Trends (Internal and External) – Build into your forecast an estimate of casual influences from internal and external trends. Internal trends include seasonality of your products and hiring talent to scale. External trends include unexpected economic crisis, competition, socio-cultural, legal, and political forces. 
  • Events and Promotions – Once a forecast is generated with the above factors in mind, events and promos can be used to help hit your S&OP targets.

The aspects of demand planning go beyond the statistical components of a demand forecast. Demand planning leverages accurate demand forecasts to create action plans for the organization while being privy to internal and external factors that affect supply at all steps of the chain and consumer demand. 

Implementation of demand planning is using analytics of product data and trade promotions to hit sales and inventory targets. Organizations must be quick to pivot and adapt to changing market conditions even after starting a demand plan. 

Demand planning is an ongoing effort to ensure peak profitability management. 

Importance of Automated Demand Planning

Failure to adopt an automated statistical forecasting and demand planning approach can lead to a wide range of issues such as missed deadlines, unhappy customers, Inventory surplus or deficiency or delayed response to market dynamics. 

Delayed response means your business can lose a competitive edge or fall behind competitors. Inability to act quickly on supply chain disruptions has material impact on both top-line and bottom-line numbers and you can end up losing market share to competitors. Below is a list of some of the business impacts of not utilizing automated planning strategies: 

Lost credibility

Losing credibility means lost business. Inability to fulfill customer orders due to bad inventory planning will lead to permanent damage to trust that customers have with your company. This will impact future orders and leave your brand with a significant damage to reputation. 

Wasted Resources

Overestimating customer demand for products leads to significant waste in time, money, and personnel. If turning over inventory fast enough becomes difficult, your business’s cash flow will be impacted. Having high levels of excess or obsolete inventory can lead to significant financial losses. 

To mitigate high costs of failure, businesses now more than ever need to trust the numbers and adopt a sophisticated demand planning strategy that leverages data and market insights. Adopting automated demand planning strategies will lead to actionable forecasts.

Aspects of Demand Planning

Understanding the work required within each element of demand planning will allow you to create the most accurate, up-to-date forecasts that will better inform your Sales and Operations Planning (S&OP).  

1. Product Portfolio Management 

Many times, past sales performance can be used to forecast future sales performance. It is important to regularly upkeep and cleanse product data. Relevant data might include inventory, stockouts as they occur, seasonality, sales, and consumer demand through peaks and troughs. The difficulty here usually is the number of systems keeping these data sets as isolated transactions. 

 

2. Statistical forecast 

Forecasts need a reference point, historical data in sales, inventory, and demand. Basically, what was actualized in the past can be a good indication of future sales. But not all data is useful, old data is typically not as useful as more current data as it might not correlate with future demand. The same bad situation happens when you do not use enough data to create a forecast. The right amount is typically trailing 24 months of most recent data. 

 

 

Example of an automated statistical forecast

Example of an Automated Statistical Forecast

 

Example of demand planning of weekly sales by item

Example of Demand Planning of Weekly Sales by Item

3. Internal Trends 

Internal trends relate to staffing issues at a level in the supply chain, seasonal demand due to product type, frozen capital, slow turnover, stockouts and general unpredictable sales volatility. Internal trends affect even the best steered businesses which makes it imperative to factor these causal influences into the forecast.  

 

4. External trends

External trends are another form of causal influence, but less predictable and usually harder to build into the demand planning forecast. External trends usually force a business to reforecast whereas internal trends are less likely to lead to a new forecast. Businesses that do reforecast and act on changing external trends like an economic recession or changing political climate are best positioned to succeed.  

 

COVID-19 has disrupted the majority of supply chains around the world in unprecedented scale. Amazon is probably one of the most recognizable organizations that has put tremendous effort in shifting their supply chain to prioritize shipping of essential items.

 

In light of COVID19, Amazon quickly refocused shipping priorities and product fulfillment to consumer essential goods. They have been quick to scale, pulling personnel and distribution resources from nonessential consumer goods and hiring 175k new workers in two months. 

 

Demand planners must be quick to identify factors that can impact demand such as natural disasters, news events, internal and external unanticipated issues. To do so, an organization needs to be armed with a central repository of all their information to generate an accurate forecast and adapt to changing market conditions to meet customer demand. 

 

5. Events and promotions

A time bound product promotion might lead to more sales in that time interval at a lesser margin. Holidays like Black Friday and Christmas can generate more sales in those few days than a whole month. 

Once a forecast is set, there needs to be a consensus on the actionable plan that comes out of the forecast. Part of this actionable plan is using events and promotions to hit sales and inventory targets. You want the right balance of inventory turnover, sales, while reducing COGS, and reducing waste in resources. Promos and external sales initiatives can help you get there. 

The Future of Demand Planning

Demand planning is becoming increasingly digital with advances in technology and machine learning. Demand planning software is being developed to better position businesses to adapt and update forecasts real time. Increasing number of businesses are now using CPM tools integrated with their ERP system to create multi version forecasts that are constantly updated and refined to estimate future sales. 

A successful demand planning action will lead to countless benefits including: 

  • Lower inventory costs
  • Decrease in stockouts
  • Waste reduction (obsolete inventory)
  • Increase in on-time, in full deliveries
  • Decrease in expedited shipping costs
  • Better pricing negotiation with suppliers

Contact Solver to Learn More about Demand Planning Software

Solver offers a flexible planning solution where powerful input forms are designed in Excel and deployed in the cloud. Solver can fit any business needs from a manufacturing company trying to forecast sales by month to a  retail business looking to forecast SKU based on historical data. 

Solver’s cloud  CPM solution is fully customizable to fit your demand planning needs. Contact our team today or request a demo for more information about our corporate performance management tool.

P&l budget estimate comparison variance report

What is Financial Multi-Scenario Planning?

With multi-scenario Planning, companies are able to analyze several potential business outcomes and forecast what overall performance would look like with each of these models. What would happen to sales? Employee headcount? Cash flow? 

 

The key drivers of each scenario are identified and modeled out to create a complete picture of the budget or forecast. This allows companies to better prepare for and predict future performance, and help account for areas of uncertainty.

 

Why is Financial Multi-Scenario Modeling Important?

When companies create an annual budget, it captures the best assumptions for performance in the coming year. These assumptions are largely influenced by historical data and trends, company strategy, and the individual budget contributor’s industry expertise and insight into the current market and economy. The more accurate budget contributors are with their assumptions, the more accurate the budget will be when compared against actual performance. 

 

Keep in mind, that a detailed annual budget only represents one potential outcome of the many variables that could present themselves in the coming year. While the final version of the budget may be considered the “most likely” outcome based on organizational expertise, it is only one possible scenario. 

 

As the economy, market, and internal operations of the business change, that “most likely” scenario may no longer align with current expectations. In fact, there may be one, two, three or more high probability scenarios that should be considered by executives and finance teams.

 

Strategy and Scenarios: Align and Refine

Top-performing companies have budgets and forecasts that align tightly with company strategy. By planning for different financial scenarios, businesses can proactively prepare themselves for these potential outcomes, ensuring alignment to strategic goals and providing the ability to quickly adjust to changes where needed. 

Companies looking to implement multi scenario planning should focus on several key areas:

 

  • Identifying and capturing company strategy
  • Defining the most probable scenarios
    • Internal factors
    • External factors
  • Using driver-based models to define scenarios
  • Measuring performance and refining models

 

Identify and Capture your Company Strategy

A well-defined financial and strategic plan acts as a compass to guide the company’s activities. But, a critical component to having an effective strategy, is ensuring it is not just known and understood by a few at the executive level, but that it is well socialized throughout the organization and it is being used to manage and measure performance. 

 

A solid strategic framework allows the company to set specific strategic goals that can be monitored and measured through key performance indicators (KPIs). These KPIs provide an easy way to define success and measure and share results and goals within the organization.

 

For example, if part of the company strategy is focused on increasing customer satisfaction, then some potential KPIs and goals might be: 

 

  • Decrease average product shipping time from 8 hours to 2 hours by 6/30/2022
  • Increase customer referrals by 15% by 12/31/2021

 

Each of these KPIs defines and effectively measures success by quantifying a goal and setting a timeframe for its achievement. By identifying, recording and tracking these as the first step in our planning process, we can then ensure our budget and forecast aligns with these goals, and if doesn’t, adjust course where needed. 

 

The image below shows a sample KPI report which compares goals versus final budgeted numbers. Where there are discrepancies between the two, management should determine if the budget or strategy should be updated so they are in alignment.

strategic budgetkpis

How to Define Probable Financial Scenarios

While the number of potential business outcomes in any given period is essentially infinite, only a small number of these would likely be considered “high probability”. These highly probable scenarios should be the focus of multi scenario planning. The goal is not to model out every potential scenario, but instead to focus on the meaningful ones that are most likely to occur.  

 

How to Build Financial Scenario Internal Factors

The majority of internal factors for scenario building link directly back to the overarching company strategy. At this point,  the question of “how will these strategic goals be achieved” is transformed into potential scenarios. This is especially important when there is uncertainty or external factors that could impact which direction the company takes to achieve their goals. 

 

In the previous example, part of the sample company’s strategy focuses on increasing customer satisfaction. To achieve this goal there are numerous initiatives that could be undertaken such as: 

 

  • Increasing headcount to improve shipping and customer service turnaround time
  • Consolidating operations to a centralized warehouse
  • Opening regional distribution centers

 

Defining each of these in detail allows executives to closely analyze return on investment (ROI) and determine the most effective course of action. 

 

How to Build External Financial Scenario Planning Factors

Regardless of how well a business prepares, there are external factors that can derail those plans or cause a change of course. These vary by business and industry, but some general ones may include: 

 

  • Economic downturn or recession
  • Market changes
  • Legislative changes 
  • Competitor shift or consolidation

 

The potential scenarios and combinations of scenarios that can be created are unlimited, but the focus should always remain on what is likely to occur and what aligns with the company’s goals. 

 

Using Driver-Based Models to Define Scenarios

Recreating a time consuming annual budget process to build out additional high-probability financial forecast models is not a viable option. The creation of each model should be something that can be done very quickly, and that can be updated easily. The most effective way to do this is with a driver-based forecasting model that leverages a top down approach to generate a baseline from historical data and trends. This initial baseline becomes a starting point that can then be adjusted at a more detailed level for key areas such as revenue forecasting, workforce planning, operating expenses, and cash flow.

 

Using easily adjustable drivers and assumptions allows for the modeling of unlimited outcomes and in-depth analysis of what-if scenarios.

 

Measure Performance and Refine Models

After developing a financial scenario model out of the highest probability scenarios, it’s critical that they aren’t put on the shelf to gather dust, but instead are analyzed on an ongoing basis for accuracy and to ensure the company is reaching its goals. Simple reports can be leveraged to determine which version of the forecast is proving to be most accurate, and this forecast version can then be slotted into existing reports and reporting packages to provide timely updated projections. 

forecast scenario

Analysis will also identify areas of your model that require adjustment. This may point to an error in assumptions, methodology, or a change in market conditions. By isolating and identifying these variances, not only is a more accurate financial model created, but a better forecasting process is continuously developed. 

 

Getting Your Financial Scenario Analysis Started with Solver

Solver’s cloud-based corporate performance management (CPM) solution provides the necessary tools to streamline and automate the multi scenario planning process. For additional information, contact Solver, or request a demo to see the solution in action. 

financial planning

Precise financial planning is an integral part of every business’s success. It also takes a substantial amount of time and energy from the business’s financial department, especially if the business is dealing with a volatile market. To meet the need for accurate and consistent budgeting, forecasting and financial analysis, large companies have formed specific financial planning and analysis (FP&A) branches within their organizations to help them plan for the future.

FP&A professionals help companies tighten their financial processes and make more informed decisions regarding business operations and financial goals. Keep reading to learn more about the FP&A process and its benefits — and how Solver can help streamline this process for companies across industries.

What Is FP&A? Overview: The FP&A Process

FP&A can be thought of as a process involving three basic steps: budgeting, forecasting and analyzing a company’s financial reports.

Within a company’s finance department, FP&A professionals provide financial reports as well as insight into that company’s financial decision-making processes. In general, FP&A professionals work closely with a company’s leadership to provide data-driven support in major financial decisions.

Unlike accountants and financial analysts, FP&A professionals analyze financial data, identify patterns and trends in their companies’ financial processes and recommend strategies to improve their companies’ financial and operational success. The role of an FP&A is multifaceted, but the purpose of this position ultimately lies within helping companies make better financial decisions.

The general FP&A process contains these basic steps:

  • Analyzing the organization’s current financial situation
  • Defining financial goals based on this data
  • Considering variables and identifying different courses of action
  • Creating a financial action plan with potential alternatives in mind
  • Revising and re-evaluating the action plan with an organization’s leadership as needed

Precise FP&A steps can vary depending on the size of an organization, its industry and any enterprise resource planning (ERP) or other software it has in place. However, the general budgeting, forecasting and analysis steps remain the same across FP&A roles.

Advice From Professionals: Improving Your FP&A Process

The FP&A process can get complex as an organization grows and takes on more financial responsibility. Oftentimes, an unpredictable economy can force an organization’s financial department to get creative when it comes to planning and resource management. This is when FP&A professionals are needed more than ever.

To make the most of your FP&A process flow, take a look at the following FP&A expert tips:

Define the Financial Planning and Analysis Process for Your Company

Every company is unique. As a result, every FP&A process is going to vary slightly from the next. In order to get the most out of your FP&A process, you need to determine what FP&A means for your organization.

To most companies, FP&A refers to the sum of all annual budgeting and monthly financial reporting processes. However, FP&A can also include quarterly re-forecasting, weekly sales reporting and other financial operations.

Determine what your FP&A processes need to look like in order to meet your organization’s short-term and long-term financial goals. Remember that your FP&A process needs to handle both financial and non-financial data from every level of your organization.

Designate a Specific FP&A Department Within Your Company

While handling FP&A processes comes with the territory of finance departments in general, FP&A has emerged as a rather specialized job.

It’s best to have a sector of your finance department dedicated specifically to FP&A processes, where you can benefit from the financial insights of experts who not only know your company but are also experienced in evaluating your company’s financial data holistically and with a vision for future growth.

Having a sector of your finance department dedicated to analyzing how your business is spending money and generating revenue will put your business on track to reach its financial goals.

Get the Full Story Behind Your Numbers

The ultimate goal of FP&A is to help you understand the “why” behind the numbers on your financial reports. FP&A professionals not only gather the company’s financial and operational data, but they also analyze it to determine patterns and correlations between the data and their organization’s financial practices. This helps business leaders spot problematic trends and develop a plan of action to improve their organization’s financial practices.

FP&A professionals help organizations learn from past data so they can improve upon their financial habits and processes. FP&A helps stakeholders understand why the numbers are what they are — and how to achieve better outcomes.

Prioritize Learning

FP&A processes will inevitably highlight opportunities for organizational improvement. When such areas are identified, companies should harness these moments and learn from them. Not every financial decision is perfect, but when an organization can acknowledge where it may be lacking and immediately get to work on finding solutions, it sets itself up for long-term success.

To make the most of FP&A processes, company leaders must embrace the financial data as they see it and prioritize learning from the insights of the FP&A professionals on their team.

Stay Future-Focused

Overall, the FP&A process is a future-focused endeavor. With so many variables such as the market, supply chains, changing internal operations and much more, company leaders can easily get lost in the details of present-day data.

However, good FP&A practices turn the company’s focus toward future growth with cutting-edge budgeting and forecasting models that take a holistic approach to the company’s growth trajectory.

Implement FP&A Software to Improve Processes

One of the best things you can do for your company’s FP&A processes is to implement the right corporate performance management (CPM) software for your FP&A budgeting process needs. At Solver, we offer innovative CPM solutions that can be tailored to the budgeting, forecasting and reporting processes of your company.

With Solver CPM software, you can keep all of your financial data in one place and put together comprehensive reports, perform advanced analyses and more.

Contact Solver to Optimize Your FP&A Processes Today

With CPM software from Solver, financial reporting and analysis has never been easier. Contact us to speak with an expert on how you can optimize your FP&A process flow with our globally popular software solutions. Submit an inquiry or request a product demo today!

 

Payroll Forecast

Forecasting is always an essential part of any business, and the workforce is typically the largest expense. 

Workforce planning includes salaries, commissions, benefits, taxes, retirement, and much more.  On average, workforce expenses comprises over 30% of gross sales, but it can be over 50% depending on the industry.  Workforce forecasting should always be the top priority for any organization.  Our guide will cover many alignments with strategies, access to data, and best practices on workforce planning and forecasting.

How to Develop a Strategic Plan for Workforce Forecasting

There are many questions to ask prior to starting any type of forecasting, and workforce-related items are often some of the most central questions.  Companies will not be able to forecast reductions, increases, or changes accurately for the workforce without a strategic plan. Data varies, but the estimation is that approximately 90% of all organizations fail to execute their strategies successfully.  

There are many reasons for the failure and it includes lack of communication, not linking strategy to planning, top down approach only, and failed implementation strategy.  Ensure that the organization has a clear strategy and communicate it clearly to the company that there is a well-defined execution path.  

Access to Data for Workforce Planning

The ability to access accurate and timely data for analysis is a necessity.  The data must be accessible in order to build workforce demand forecasting models. There can be a lot of data and below is an example of some of the data by employee by month that would be beneficial in creating a model:

  • Salary
  • Commissions
  • Bonuses
  • Promotions
  • Taxes
  • Benefits
  • New Hires
  • Title
  • Terminations
  • Overtime
  • Headcount by Position
  • Hours Worked
  • Benefit Eligibility

The first question to ask is whether you can access the data.  Determine where the data is coming from and create a process to integrate the data so there is a seamless process monthly or quarterly depending on how often forecasting happens.  

Spot check the data to ensure that the data is accurate as workforce accounts for over 30% of expenses, so a small variance can have a large impact.  For example, if a benefit comprised 1% of gross revenue of $100 Million and the assumption was off by 50%, then the variance would be approximately $500,000 for a single benefit.  This is a substantial variance for just one benefit, which can affect decision-making.   

Generally, workforce demand forecasting models are the most complex templates that organizations have.  The more accurate the data is, then the less complex the models need to be and many of the assumptions go away.  A model allows for enabling quick and accurate decision-making for managers and executives around changes that may need to happen.  They can quickly create multiple what-if scenarios that provide the foundation for the best decision making possible.

How to Forecast Change in the Workforce

There are many ways to go through planning for changes in the workforce.  First, as stated above, set a strategy to provide everyone using the model the clarity to make decisions that meet the strategic plans.  

If management expects production to increase by 50% in manufacturing, then typically there would need to be an increase in workforce or a plan about using more robotics, which may decrease workforce to meet the demand.  However, without this information, the accuracy of the plan will not be accurate.

Decide whether to use a top-down, a bottom-up, or a hybrid of the two approaches.  A top-down approach is when senior management determines the plan and pushes it down to the rest of the company.  A bottom-up approach is when line managers plan and then it rolls up to a consolidated plan.  A hybrid is using both methods and then comparing as different versions. 

Executives can provide a top-down version as a guideline for the managers.  The key to a top-down approach is a model that provides quick what-if scenarios based on adding new hires, modifying benefits, or terminating a percentage of the workforce as an example.

The bottom-up approach typically has two methods and uses the approach that best fits your organization.  One way is to forecast at the employee level.  Managers would go in and enter in new hires, possibly terminations, raises, overtime, and any benefits that a manager would have information on.  This method is very accurate but may have flaws if there is a lot of turnover.  The second method is to plan by headcount by position.  This method would list a job title and how much headcount along with an average salary.  This is not as accurate as it uses an average salary, but works for large organizations that have many people in similar positions. 

Finally, it is important to understand how the organization has been in the past regarding their workforce.  Ask questions such as the following:

  • Is the organization good at hiring or firing?
  • Does it hire too early or too late?
  • Does it usually run a very lean organization or does it get too large?
  • Do certain departments get more budget than other departments?

Understanding this information is vital as it should be included in the plan.

 

The image below offers an example of a partial forecast form where a user can enter a goal, make changes, and see real time changes.

Payroll Forecast

Workforce Forecast – Reporting Process

Reporting is the last step and this comes down to two main parts.  

First, have reports to determine the variances of the workforce forecast against the actual by department.  Next, analyze and document the variances.  Determine if the variances were due to assumptions being incorrect and then modify the model so that it can be more accurate going forward.  If the variances are due to changes in decisions, then document it so that it can be accessible in the future, in case questions come up.

Second, determine the workforce metrics that are important for the organization.  Below are some metrics that may be useful:

  • Revenue/Employee: tracks productivity of the organization over time.
  • Employee Turnover: number of terminations divided by average number of employees.  Note modify to separate out voluntary and involuntary terminations.
  • Benefits Cost/Employee: determine trend by dividing all benefits by employee.  A variation is dividing this by total payroll.
  • Overtime Percentage: overtime divided by total payroll.
  • Time Since Last Promotion: average time in months since last promotion.  This can signify an issue if many top employees are leaving.
  • Time to Hire: the number of days it takes from posting a position to signing the offer letter on average.
  • Engagement: use a survey to ask questions of employees annually and compare over time.

 

This dashboard example is provided by Microsoft shows visual workforce analysis – https://docs.microsoft.com/en-us/power-bi/sample-human-resources

Solver offers an array of workforce demand forecasting models to help set you up for success. You can review some examples in the images below.

Human Resources Dashboard

Contact Solver to Learn More about Workforce Forecasting 

Workforce forecasting is an imperative function for all organizations and it all starts with a good strategic plan. After that is complete and communicated, then provide data access and create models that can enable world-class decisions. Finally, analyze the reports, review the metrics, and make changes based on the analysis.

Our team at Solver can help set you up for workforce planning and forecasting success. Contact our team today or request a demo for more information about our corporate performance management tools.

liquidityriskanalysis

Nobody likes a budget that is far off target, especially when it could result in a liquidity crisis. Luckily, most companies rarely have to experience such a stressful event. Although, in a turbulent economy where interest rates and stock indexes move up and down like yo-yos and news about corporate layoffs are part of daily news headlines, strong financial clarity does not seem like a bad idea.

So, what does a cash flow forecast mean to most people?

Here is a definition: A cash flow forecast is a plan that shows how much money a business expects to receive in, and pay out, over a given period of time. 

Based on the definition above, it seems logical that all businesses should have a cash flow forecast perfectly ingrained in their corporate processes, but is that the reality? Let’s take a closer look at this.

Are All Businesses Doing Cash Flow Forecasting?

As much as it seems to make perfect sense to have a good estimate of your future cash outflows and inflows, many companies never get around to doing it. This is especially true in small and mid-sized businesses. Some of the reasons for the lack of cash flow forecasting models are the following:

  • The finance staff don’t have time to prepare it
  • Lack of tools that automate cash flow forecasting
  • Complexity in creating a good cash flow model
  • Lack of accuracy in past models leading to reduced appetite to repeat it
  • Other business tasks or fires keep executives focused in other areas
  • The financial planning team is exhausted after then annual budget process with no time or motivation to re-forecast the budget during the year

Regardless of the reason for not doing a cash flow forecast, healthy cash flow is the lifeblood of all businesses, so there is no lack of motivation.

Let’s look at the potential benefits of accurate cash flow forecasting.

Why Do Companies Want to Project Their Future Cash Outflows and Inflows?

Most executives know they would sleep better at night if they had a mechanism that fairly accurately could tell them if the liquidity of their business is healthy or not in the months ahead.

Below is an example of a report using simple color indicators and charts to help managers analyze the company’s projected cash position based on underlying cash flow forecast.

liquidity risk analysis

There are several very logical reasons why a company can benefit from regular cash flow forecasts, including:

  1. Reduce the risk of insolvency – by having a clear idea of any upcoming liquidity issues, management can react early and avoid drama and stress
  2. Move faster on investment opportunities – if you, thanks to a cash flow forecast, early on know that the business will be flush with cash in the months ahead, you can start planning acquisitions, down payment of high interest debt, purchases of strategic capital assets, etc.
  3. Satisfy bankers to enable debt financing or other bank-backed financial transactions

In other words, solid cash flow forecasts can be of tremendous value to a management team. However, if many financial teams dread the additional work of doing planning and performing a cash flow analysis, how can companies still get it done?

How to Automate Cash Flow Forecasts?

As in many other cases, technology can help automate laborious tasks. In the case of cash flow forecasting, there is a cloud software category often referred to as Corporate Performance Management (CPM) solutions that includes vendors such as Adaptive Insights, Centage and Solver that specialize in planning, budgeting and forecasting.

Benefits of CPM tools include scenario forecasting to predict “great”, “good” and “bad” scenarios so managers can plan accordingly. In other cases, CPM solutions provide entire driver-based forecast processes. Driver-based means that the forecast includes assumptions that help automate and simplify creation of sales, payroll, expenses, balance sheet and cash flow forecasts.

Sometimes managers don’t have the time or the need for a full forecast to analyze projected liquidity, in which case they can use simulation models to quickly adjust elements of their cash outflows and inflows to see the impact on the cash position as seen in this example:

cashflowanalysis

Most executives would agree that accurate cash flow forecasts provide numerous benefits to their business. During economic turmoil cash flow forecasts can help lower the risk of running into liquidity problems and increasing the chance to be ready to jump on investment opportunities. Regardless of the motivation, there are good tools available to help automate and simplify such financial planning processes.

At Solver, we offer Corporate Performance Management Solutions that help you establish cash flow forecasts and analyses and prepare for uncertain times. Contact one of our expert team members to learn how we can help you improve your cash flow processes.

Contact Us Today

blog image for corporate performance management during COVID-19

As we all struggle to adjust to our new reality of social distancing and general economic uncertainty, it seems as if our expectations for the future are changing day-by-day, if not hour-by-hour.

It is hard to tell what next week will be like for businesses across the world, much less what next month will look like – or six months from now. However, with a good Corporate Performance Management (CPM) solution, your company can gain insight into a range of possible future scenarios, so you can start executing meaningful action items right now.

With the right CPM in your toolbox, you can get fast answers to pressing COVID-related questions, such as:

  • How will it impact my business if I let some employees go? 
  • What can I expect for cash flow, as things stand now? 
  • Which expenses should I cut – now and later?
  • Who are the customers that are slow to pay? 
  • What is the best case scenario of COVID on my business… and the worst?

If you are not sure how to find those answers with your CPM, or if you are not sure whether your current system provides this critical information, this article will help.

What Are the Two Essential Capabilities of Corporate Performance Management During COVID-19?

If you already have and use a world-class Corporate Performance Management system such as Solver, Adaptive Insights, or Prophix, you can breathe easy. You already have access to the tools you will need to answer your COVID-related questions.

Those tools are:

1. Forecasting

Due to the ever-changing nature of the COVID-19 pandemic, nearly every company across the planet is having to throw out and replace their 2020 budgets right now. Forecasting on the fly can be difficult if you are working from spreadsheets but, with a highly effective CPM solution, you will have the freedom to run new forecasts for every twist and turn as the coronavirus situation unfolds.

Some of the best forecasts to run include:

  • Payroll modelling / forecasting

As a business leader, you already understand that it is possible you may have to let a few employees go or do a temporary salary cut before we all return to “business as usual.” This forecast helps you clearly identify the effect of your staffing strategy, so you can be more confident that you are making the right choice.

  • Sales modelling / forecasting

Perhaps you are not looking at staff reductions. Essential industries such as healthcare or food and health manufacturing are experiencing a steep rise in sales as a result of the coronavirus. However, whether your sales are on the rise or your company is facing a temporary slowdown, it is critical that you have accurate, timely insight into what you can expect for sales and revenues in 2020.

  • P&L, Balance Sheet, and Cash Flow forecasting

It is always a good business practice to keep a close watch on your P&Ls and Balance Sheets to make sure your financials are in order. With the abrupt market shifts we are all seeing right now, it is more important than ever to closely oversee changes in your operating, investing, and financing cash flows as you update your strategy.

2. Reporting

In an emergency, it can be difficult to sort through the sea of reports available to you from a Corporate Performance Management solution, so here is your quick guide to the essential reports you will need right now.

  • Multiple forecast versions compared

Gain insight into your organization’s best-case scenarios, worst-case scenarios, and everything in between using this easy-to-understand comparison report that maximizes your forecasting vision.

Actuals vs. Budgets are handy when your budget fits a predicted scenario, but we think it is safe to guess that your budgets do not quite match up with your reality right now. This report replaces your budgets with forecasts, so you can perform a more accurate actual vs. “budget” comparison that is based on the most up-to-date data.

  • Reports focused on vendor and payroll expenses

It may be time to cut expenses soon, so knowing which of your expenses are “expendable” may be critical information for your company. This report gives you the numbers you need, so you are prepared to cut back if and when that is required.

  • Customer aging receivables

Right now, every company across the world is anxious about the future and rethinking their expenditures – including your clients. By using reports focused on customer aging receivables, you will get quick and accurate insight into which of your customers or clients are late to pay, so you can check in instantly.

Not Using a CPM Solution Yet? There Is Still Time.  

If you are relying on unwieldy spreadsheets or the limited reporting options included with your ERP, you are probably frustrated at the lack of insight you have.

In truth, lack of insight can be a big problem for companies right now, considering how quickly the economic landscape situation is changing. If you are ready to get accurate, up-to-date financial and operational data at your fingertips, including easy-to-read KPI dashboards, planning tools, and a secure data warehouse to house all your data, now is the right time to get your Corporate Performance Management solution set up.

Setting up a modern CPM solution is easier than ever, but you will still need to make sure you choose the right solution for your needs. Though you have a wide range of strong CPM solutions available to your company, your ideal solution will depend on your unique business setup, size, industry, integration needs, and objectives.

However, to make sure your CPM system meets your precise needs during the coronavirus situation and beyond, you will want to ensure you choose a CPM that fits these requirements:

  • Cloud-based solution

If your workforce is largely working from home (WFH) for the duration, now will not be the right time to deploy or support an on-premises / in-office server solution. A cloud-based CPM is more convenient to implement and support during a disruption, and it is also more convenient to access for consultants working from home.

  • Rapid deployment

A CPM that takes months to deploy will not help you solve the situation right here and now. Cloud-based solutions are faster and easier to deploy than on-premises solutions, and CPMs that include pre-built vendor report and forecast templates will get you analyzing your evolving numbers the same day your solution goes live, so you can answer your critical questions instantly.

Learn More About Your Options for Corporate Performance Management

If chosen carefully, effective, cloud-based CPMs can help you maintain your agility with quick decision-making during the coronavirus or any other unexpected setback.

Ready for some advice that will help you determine which CPM is right for you? We can help.

Since 1996, the global team of CPM experts at Solver have helped companies like yours successfully navigate the rapidly changing business landscapes that define our modern, global commerce world. We are happy to share our expertise with you, so you can find your path through this unexpected and unprecedented worldwide situation.

Truly, you can ask us anything about CPM. We promise you a careful, well-reasoned answer that makes sense for your exact needs. (We do not like one-size-fits-all answers, and we suspect you do not like them either.)

 

We guarantee that when you contact Solver, you will get the guidance and help you need to understand all your CPM options, so you can confidently move your business forward in all situations, including right now.

Ask Solver a Question.

 

It is easy to predict the future when it is business as usual. However, if your business environment is suddenly impacted by something like the coronavirus, a delayed product launch or an unplanned acquisition, your corporate budget may become obsolete very quickly.

How Do I Know it is Time To Replace the Budget with a Forecast?

Sometimes unexpected events happen and it is clear the company’s actual performance is moving so far above or below the annual budget that it no longer provides value in the following ways: 

  • A cost control tool
  • A target for employee compensation plans
  • A detailed financial break-down of corporate strategic goals
  • A financial plan for various corporate initiatives

There are many signs that you need to create a budget reforecast because it is becoming obsolete due to unexpected events, such as:

  • Management comments why a revenue or expense budget variance is occurring
  • Complaints from sales teams that their targets are too high due to XYZ event
  • Lack of budget ownership from department heads

In addition, you will start hearing from executives that the budget column in the financial statements is “useless” or that the budget target figure in a Key Performance Indicator (KPI) is no longer valuable. 

Some organizations have a predefined monthly, quarterly or semi-annual reforecasting process, and when the unexpected happens, they simply take this into account next time they reforecast. These companies often have budgeting and forecasting software such as Solver, Adaptive Insight or Planful to speed up and automate the time and effort it takes to create budgets and forecasts.

Other organizations’ forecasting techniques only include a single annual budget version as a baseline, and for these companies a “forced” reforecast due to unexpected events might involve a lot more arms and legs and interruptions to people’s work schedules.  

What to do When the Corporate Budget Becomes Obsolete?

Companies generally do one of the following when their budgets become obsolete: 

  1. Do nothing and live with the undocumented comments and questions until next year’s budget is launched
  2. Leave the budget as is and use report comments to explain big budget variances (see sample screenshot below).
  3. Reforecast the rest of the year and replace the now defunct budget with the new forecast

Most companies enter their corporate forecasts at a higher level than the annual budget, and often it is only done at the Profit & Loss account level and sometimes also for Balance Sheet and Cash Flow.

In most cases, smaller organizations with well organized, home-grown Excel models can forecast in their spreadsheet and then re-import the forecast into their ERP system or third-party reporting tool. In mid-sized and larger organizations even forecasts at the GL account level may require a lot of work due to requirements to do this by division or department. These companies either have more human resources available to perform the work or they use a budgeting tool to automate it.

Picture1

How to Reforecast Your Budget?

Whether your forecasting requirements are simple enough to be handled in Excel or your company is using a modern budgeting tool, there are ways to avoid the painfully slow bottom-up data entry process. The problem with the latter is that the new forecast may already be old by the time you are done. In these cases, the unexpected event that led to the reforecast could have changed again, leading you to start all over.

Budgeting and forecasting software automation typically means that your input model is highly formula driven. For example, your forecast model can rapidly calculate all the required entries automatically such as % Revenue Increase, Target Net Income, Reduction/Increase in Headcount, etc. This functionality has many names such as:

  • Top-down planning
  • Driver-based modelling
  • Break-back modelling (see sample screenshot below)
  • What-if analysis

Picture2

Regardless of what you call it and the type of planning tool you use, an automated reforecasting model can create an entire forecast in minutes or hours versus days or weeks with manual methods. 

 An automated model also allows you to create multiple scenarios. For example, armed with a “Best Case”, “Worst Case” or “Likely” forecast scenarios, you can be prepared for unexpected events without rushing to reforecast. Instead, you replace the “Likely” budget version with the already created “Best Case” or “Worst Case” scenario and you are done. 

If the situation calls for a brand new scenario, you adjust the drivers in the automated model and it will recalculate and store the underlying account-level forecast transactions.  

When your company has the right tools and plans ready for a budget reforecast they will be prepared for a virus outbreak, stock market crash or exciting acquisition of a competitor. Planning ahead will reduce stress and blood pressure for the organization’s finance team.