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THOUGHT LEADERSHIP
WHAT IS THE POINT OF PLANNING,
BUDGETING AND FORECASTING?
THE ANSWER MAY SURPRISE YOU, ESPECIALLY IF YOUR
COMPANY IS UNDERPERFORMING.
BY: JEFF RADTKE AND RAYMOND ANDERSON
The Planning, Budgeting and Forecasting (PBF) process is a
Finance department function that is time consuming, often
misunderstood, and generally disliked. For companies that are
growing and healthy, the process can serve as the foundation for
long-range strategic, operational, and financial planning. However,
in an underperforming company or turnaround it is especially
critical to improving profitability and may be the basis of the
success or failure of the company. So, why is it needed and what is
it supposed to accomplish? The answer varies depending on whom
you are talking to, and to which aspect of PBF you are referring.
What is PBF?
The PBF process is actually three unique sets of activities that are often
grouped together:
PLANNING
Planning provides the overall venue and process for stating the direction
and financial objectives of an organization. Most companies put together
an annual plan that is part of the larger strategic plan of the company. This
is where the senior executives lay out their vision for “what is possible.” In a
deeply distressed company, where survival is in question, timeframes may
be compressed. However, it is critical to maintain a long-term view in these
situations so that short term tactics do not overpower long term goals.
The overall planning picture is commonly composed of two or three main
components:
• Strategic Plans: Set overall long-range goals and objectives. These are
often are both qualitative and quantitative in nature.
• Long-Range Plans: Typically, these set financial targets over a three to
10 year horizon, and they comprise the quantified financial plan for the
strategic plan above. A shorter time horizon (i.e. three to five years) may
be more appropriate where a company is in a state of extreme change.
• Annual Plans: This is the first year of the long-range plan and provides
the high level targets to guide the budget.
THOUGHT LEADERSHIP WHAT IS THE POINT OF PLANNING, BUDGETING, AND FORECASTING
BUDGETING
Budgeting supplies the execution path for the
plans with a detailed, operational and short-term
view. Planning provides “what is possible;” budgets
outline “what is expected” from the business,
based on the approved annual plan. Budgets are
absolutely critical in monitoring historical progress
and adjusting activities or implementing new
activities to meet turnaround or profitability goals.
The budgeting process is broadly focused on
the following major components:
• Sales/Gross Margin Budgets
• Capital Expenditure Budgets
• Headcount Budgets
• Operating Expense Budgets
FORECASTING
Forecasts typically use actual performance
data to project the remainder of the current
year’s performance. Rolling forecasts are the
same concept but reset expectations for some
predefined future period, usually 12 to 18 months.
BRINGING IT ALL TOGETHER
The PBF processes are in fact related but they are
also distinctly different. Recognizing this is part
of understanding the overall purpose behind the
general process and what types of improvement
opportunities exist. In fact, there are significant
points of view and multiple studies that outline all
the various issues with the overall PBF process;
however, few have tried to answer the fundamental
question: what is the main purpose of the overall
PBF process? Here is an example that helps to
answer the question:
A few years ago, Huron Consulting Group met with
a client reviewing its P&L and associated cash flow
forecast. The company was historically profitable
with strong cash flow. We thoroughly examined
the income statement and all the forecasting
logic as well as ties to performance improvement
activities and were quite pleased with the
forecasted profit and P&L-based cash flow
implications (e.g. EBITDA). The forecast showed
a nice trend of profitability and implied cash flow
looked strong. Things started well.
We then reviewed the balance sheet. Like most
