70% to 80% of companies are in the mature stage of the business life cycle. In this phase the demand for goods and services has been saturated resulting in the slow or declining growth. There is a constant pressure to grow market share. In order to stay profitable, companies need to cut costs particularly in hyper competitive environments. In this kind of market condition, it becomes important for companies to plan and forecast efficiently.
This blog talks about the challenges or pain points in a traditional financial planning process and why it is imperative to have a planning process that is execution focused and one that promotes efficiency.
Challenges in Planning and Forecasting
Planning and forecasting is tedious, mundane and a sequential business activity that rarely secures the proper attention by the stewards within a company. The data gathering and compilation stages of a planning process are usually relegated to the back office. Back office personnel require input and validation of market knowledge that is in the possession of field staff. Any output or ‘Plan’ that is unilaterally compiled by the back office units is subject to significant resistance by operational staff. The lack of ownership of a business plan is perhaps the biggest reason impeding a company’s ability to achieve objectives in today’s environment.
Lack of ownership of a business plan can be attributed to the following:
- Planning teams rarely seeking 360 degrees feedback
- Poorly calibrated targets whereby they are too heavily influenced from the top
Companies fall into a syndrome of missing plans. Rather than changing the planning process, companies react by deploying more staff and allocating more time to the compilation stage. To their dismay there is rarely any meaningful improvement in the achievement of results.
Common pain points in traditional planning process:
- Process is heavily back office driven.
- Process is spreadsheet driven. Staff is talented in data management and developing spreadsheets but rarely has sufficient market knowledge
- Changing Market Conditions are inadequately reflected in business assumptions because there is a disconnect between the field staff and back office
- Communication of the plan objectives and business imperatives throughout the organization is ineffective
- Re-forecasting is very time consuming and recalibration of the plan is slow
- Company executives spend more time in compilation than on strategy and analysis
- Increased number of companies have been missing earnings
- Increased number of companies are filing supplementary or 10K reports
- Fewer companies providing earnings guidance
- Missed earnings culminates in significant erosions of the market cap
The problem is exacerbated in regulated/mature industries.
In regulated industries:
- More time is required by the back office staff to discharge compliance requirements
- More onerous capital requirements have the effect of diluting returns
In mature industries:
- Zero sum game culminates in lower EBITDA margins
- Business retention is difficult
How effective the current software solutions are:
In the current market conditions, it is imperative that companies plan and execute efficiently. The software solutions that are in the market are mostly old accounting software packages that have been modified to provide forecasting and budgeting functionality. Although new modules have been added to provide forecasting functionality, the fact is these solutions were built many years ago on old technologies. These are big dinosaur solutions that are not adaptable and do not provide flexible workflows to foster alignment throughout the organization.
The problems with these solutions are that they:
- still promote back office planning
- still support traditional sequential planning
- are very inflexible, complex and cumbersome
Most of the companies do need help in effectively building and executing a plan, but they do not want to spend large capital on software solutions. A majority of the solutions are very expensive and try to solve every problem, and hence clients do not get bang for their buck.
In the next section ‘Take the pain out of planning and forecasting‘ (http://wp.me/p41J3i-B) we will talk about an enterprise-wide software solution that is light weight and focussed only on business planning and monitoring.
Next: ‘Take the pain out of planning and forecasting‘ (http://wp.me/p41J3i-B)