Springtime is a great time of natural renewal, bringing new hopes, and new energy. What’s even better is that the new budget cycle is two quarters away. However, this is just the time to refresh our thinking, and review the processes which will define the life of our Finance team when nature starts shifting back into the sleeping mode.
One of the tricky questions is, what level of detail should we use in our planning. Let’s take the travel budget as an example. Despite often being quite a small cost bucket relative to COGS, say, or marketing expenses, this budget line attracts disproportionate management attention, so it’s worth giving it some thought. So how do we plan travel? Do we ask each department head to produce a list of trips showing destination, duration, purpose, and so on? Then run it through a database of hotel and ticket rates, add food expenses and extras, and produce a budget per person per trip? Great idea, don’t you think? We will get a super-detailed budget, and what’s more we’ll be able to control it tightly! We will be proper efficiency gurus, ambassadors of zero-based budgeting, won’t we?
Well, we might… Provided, we can
(a) truly make it happen: in other words, that Finance has enough organizational power to make functions do this work, as well as having enough resources to manage the calculation,
(b) keep this system running throughout the year, with actual vs plan analysis and regular re-forecasting, so that this budget remains relevant, and
(c) explain to ourselves, and also to the business, what we are actually trying to achieve by investing such a tremendous effort in this specific area.
This last point is an interesting question, really. What do we gain by financial planning with such a level of granularity? Accuracy, one might argue. Possibly, yes, if the incoming information is of sufficient quality and is processed efficiently. The downside of granular planning, however, is that we have to make so many more assumptions than when we do it at a higher level. Assumptions about each trip, each hotel cost, each ticket rate. Statistically, the more assumptions you make, the higher the probability of error. Moreover, according to Murphy’s law, any errors will not be mutually eliminating, they most likely will be magnifying one another.
Another potential benefit is the possibility of meaningful variance analysis, which explains properly what was the driver of the actual-to-plan difference: which department, what was the impact of the number of trips versus the exchange rate. True, provided that the resource needed to support this analysis does not end up costing more than the travel budget itself.
Another caveat in bottom-up budgeting is that somehow the resulting figure is often too high in comparison with what the company is prepared to afford, and so we have to go back to the business functions saying: “well done, thanks for the effort, but please do it again and the result should be 20% lower this time”. Frustrating, isn’t it?
So what is the right answer? As we Finance people are fond of saying, it depends. If we can’t honestly say it’s a cost line which will impact business performance, we should be brave (yes, it does take courage to give up on detail), and adopt a lighter forecasting method, like incremental budgeting, or high-level control.
However, if it’s a truly important cost bucket, very material, or if it’s attracting many questions from the top management, then reasonably detailed planning, with clear drivers and underlying assumptions is most likely unavoidable. A good, robust, user-friendly tool, like Anaplan for instance, will support this approach and turn it from a number-crunching nightmare into a well-organized process. In the end, the decision is yours, and we are here to support you.
Lisa Palitsyna,
Senior SME
Finance and Performance Management
Planingo
