Today's dynamic business environment demands more accurate projection about the future. Forces such as intense competition, changing regulatory requirements, disruptive technologies, demands for financial transparency, and more sophisticated customers and investors compel companies to develop a clearer picture of the future so that they can react faster, while at the same time lower the level of uncertainty with their business. We have seen over time how markets have responded to companies that fail to deliver expected results. Those that fail have seen their stock value diminish. On the other hand, companies that consistently deliver are rewarded with higher market capitalization. The key to gaining the confidence of the market is in reducing the level of uncertainty by setting the right expectations. To do this, companies must be in tune with the realities of their business so that they can project the future more accurately and manage performance towards their goals. Yet, despite advancements in technology, a great number of companies operate their business using inadequate planning systems, effectively hampering their ability to execute their strategy. No matter how great its products are, a company cannot realize its full potential with a flawed planning system.
Enterprise planning solutions enable a company to plan accurately so that it can allocate its most precious resources effectively and respond to a dynamic business environment. The goal of enterprise planning must be achieved through a comprehensive performance management framework consisting of planning, scorecarding, and business intelligence. By establishing the company's future state, enterprise planning provides the basis by which performance is measured. From the plan, the company generates its key metrics to monitor performance. Through business intelligence and analytics, it attempts to understand deviations from plan so that it can respond appropriately. Enterprise planning engages people, process, and technology to anticipate the future. It is a multi-faceted discipline that spans the whole enterprise, and not just the Finance department. When everyone is aligned in a unified forward-looking motion, in touch with every vital aspect of the business, the company becomes more proactive and adaptive to changes in its environment.
Problems with traditional planning processes are commonplace. The process can be time consuming, involving countless hours of activities that add little value. Changes in the business environment are seldom reflected in the plan. The integrity of data is questionable. The process of collecting and consolidating plans creates a lag that makes information obsolete by the time it reaches the decision maker. For non-financial managers, the task of preparing the budget seems to be more of an invasion of their time rather than a rather a meaningful, productive exercise. They feel overwhelmed by the demands for financial projections that have little connection to the realities of their business. Many of these problems are evident in companies that have inadequate planning systems.
Ideally, operational targets are linked to financial measures. When the link is severed, decisions by people on the ground are not reflected in the financial plan, and high-level corporate strategies do not translate into discrete operational plans.
Many financial plans are developed in silos by individuals whose perspectives do not go outside of departmental boundaries. In many cases, even individuals within the same department work in isolation, unaware of how their work affects others. In such a fragmented enterprise, planning likely becomes a win-lose proposition and managers tend to view planning as an opportunity to protect existing resources rather than a purposeful endeavor.
Planning cycles must be in sync with major milestones in the business so that the company can reposition itself in anticipation of change. When the time it takes to develop the plan is too long, the plan becomes obsolete before it is finalized. Because of the tremendous effort involved in starting and completing a planning cycle, traditional planning cannot keep up with the business dynamics and is often relegated to an annual or semi-annual ritual.
When plans are imposed from the top down, or from the finance area, they will likely fail to receive buy-in if there is a lack of common understanding of the basis for the plan. The planning process must engage all lines of business managers in a collaborative approach in order to ensure ownership and accountability, and the plan must reflect the contributions of both upper and lower layers of management.
While today's business literature has placed considerable focus on sophisticated enterprise-wide planning systems, most companies still plan using spreadsheets, sending planning templates back and forth, and spending an inordinate amount of time collecting and consolidating plans. A survey by CFO Research Services asked finance executives about their efforts to transform their planning, budgeting, and forecasting processes. Of those who responded, 73% rely primarily on spreadsheets and manual processes. Only 16% use analytical applications, and only 11% extract the necessary numerical information from their accounting modules. Spreadsheet-based planning is littered with problems and is often a chaotic, frustrating, and ineffective process, causing managers to submit unrealistic budgets and senior executives to fudge the numbers at the top. This drives a wedge between senior executives and lower-level managers, and alienates people who are accountable for the plan but feel a certain distrust of the numbers by which they are now measured. Other problems are familiar.
Developing a model in a spreadsheet appeals to many users because of its flexibility. You can develop a model without the need for a preliminary blueprint or prototype, because the spreadsheet imposes no rules or structure for designing or laying out your model. While this is all well and good for a simple model, you will soon realize that a spreadsheet-based planning process can quickly degenerate into "spreadsheet hell". A simple insertion of a row or column can be a daunting task when numerous worksheets are involved. Macros that execute routines must be recoded, retested, and redeployed to account for the change. The fact is that the spreadsheet, while a powerful personal tool, lacks the structure that is so vital in enforcing the discipline necessary to support and maintain any process on an enterprise scale.
Even the most carefully-crafted spreadsheet carries the risk of formula errors. In a spreadsheet, formulas are embedded in cells and then copied across many rows, columns, worksheets, and workbooks. This method may not seem initially onerous, but when you have to make a change in formula to multiple spreadsheets, it is easy to make a mistake, especially when there is no central place where calculations reside. Errors come in many forms, from a simple typographical mistake to completely overlooking a critical component. Because the calculations are scattered and mixed with data, finding a formula error is like searching for a needle in a haystack.
All too often, spreadsheets are developed by individuals in finance and so are designed to be user-friendly to the designer. To a non-financial person, it could be the opposite. A spreadsheet that contains complex formulas that refer to multiple cells across several worksheets can be intimidating. When users do not understand how their numbers are arrived at, the planning process loses its integrity.
When spreadsheets are distributed across the organization, the task of collecting and consolidating them can be extremely time-consuming. No wonder that in some companies the task of consolidating is a full-time job. Not only must the plan be submitted on time, it must be the correct version, and it must roll-up the latest organizational hierarchy.