It’s no secret that many business financial outcomes are driven by company-specific values directly tied to internal factors. This is in addition to external factors, such as the economy and direct or indirect competition. These values affect many areas of the business, either directly or indirectly.
There are correlations among certain areas of the business, and identifying these connections, or relationships, is the first step in successfully putting together a plan that will translate into a reliable budget. Properly executing this business budget will greatly assist in meeting goals and business objectives that are communicated through a strategic plan.
This is true for any type of business. It may not always seem apparent, but if you think about it, you will identify at least one direct correlation and quite likely several. This is not earth-shattering news, but in the course of running a business, many managers do not seem to have the time or inclination to identify these correlations and actually come up with numbers or KPIs (key performance indicators) unique to their companies, numbers that are the basis for these drivers.
In a manufacturing company, where many of the operations are performed in house, your output (quantity of product that can be made and sold) is dependent on machine or work center capacity, proper scheduling of jobs, and on direct and indirect labor. Other factors might be storage facility limitations, or perhaps the shipping and receiving facilities loading docks’ capacity to handle the required output.
If you forecast sales without considering these factors, even if you believe that customer demand can justify it, you are only fooling yourself. Your actual sales will likely deviate from your budget. Your forecasted financial results will not live up to your plan and budget, and there may be other consequences due to poor planning and budgeting, such as a bad (or no) cash flow forecast or not complying with lenders’ financial covenants. This is just one set of realities that may apply to one industry, manufacturing in our example. Even within a single industry, drivers may vary, so you must use your own known drivers and KPIs when building a plan. A well-designed budgeting, planning and forecasting solution with an integrated analytics module will handle many types of industries and will allow its users to define and implement the exact set of drivers required in their model.
When selecting planning, budgeting and forecasting software, make sure it offers a clear way to set up and use its drivers, ideally without having to do any custom programming and without having to establish formulas or links to traditional worksheets. The drivers should be available to use in multiple areas of the application and easily modified as needed, while at the same time allowing the user to keep building a library of drivers as they continually perfect their model.
This is especially critical in SMBs (small and medium-size businesses), where all CPM (corporate performance management) activities should be performed in house without relying on external consulting, which is always expensive and often unpredictable, and in many CPM applications is always required, even when attempting to implement the slightest changes or additions to the plan’s model.
Experience across many industries shows that no matter how accurate, detailed and thoughtful your business budget, the likelihood of your actual results closely meeting your financial forecast and expectations is relatively low. There are so many factors that cause actual results to differ from that expected. These variances can sometimes be staggering.
Having drivers as a central piece in your plan can certainly make your plan more realistic and will give you a real opportunity to examine your operations and implement changes that, in turn, will more closely align your actual results with your strategic and operations plan. Not adhering to these principles is equivalent to taking a shot in the dark and hoping to hit your target. How often does that happen?
When modernizing their budgeting and forecasting systems, organizations of every size rely on Centage Corporation’s Maestro Suite which includes Budget Maestro™ to help them keep track of and manage their cash flow. Budget Maestro improves the efficiency and effectiveness of business budgeting and planning, financial forecasting, financial consolidation and
reporting processes. For more information, take a tour of Budget Maestro, contact Centage, or call 800-366-5111 now.