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Financial Planning and

Forecasting Financial Statements

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Many managers compare financial planning with having a root canal: time-

consuming and painful. Even worse, they are left with nagging doubts that the results

might not be very reliable. According to a recent survey of finance professionals, only

45 percent are satisfied with their current planning process, and 90 percent believe it is

too cumbersome. Nevertheless, 71 percent of the finance professionals believe long-

term strategic planning is the single most critical activity for future success.

What’s wrong with the current planning process? First, it’s too slow. The process

typically starts in July and ends in December. Given the ever-shortening life cycles of

many products, plans are often out of date before they are completed. Second, it re-

quires a considerable amount of managerial effort. On average, five full-time finance

employees plus eight full-time nonfinance employees each spend four person-months

onplanning, equivalent to 4.33 person-years.

The process begins with data acquisition, including sales revenues, costs, invento-

ries, batch sizes, defect rates, the number of repeat customers, product mix by customer-

type, and hours of employee-training. Unfortunately, only 24 percent of companies cur-

rently have a unified planning and reporting system—most have stand-alone software

packages and spreadsheets that vary from division to division, making data acquisition

time-consuming and error-filled.

The next step is setting targets for growth and financial results. Instead of basing

targets on analysis, they are often set through negotiation between staff managers who

make the budgets and line managers who must execute them. Fully 66 percent of man-

agers believe planning is influenced more by politics than strategy.

Given the importance of financial planning, it’s not surprising that many companies

are reengineering their processes, with plenty of help from consulting firms and software

vendors. With information technology that standardizes data, links data throughout the

company, and pulls it directly into the planning process, many companies are dramati-

cally shortening the planning cycle. For example, Sprint replaced annual budgets with

quarterly reviews, and Nationwide Financial Services reduced its budget cycle from four

months to a few weeks. Similar revolutions are occurring in forecasting, with analysis re-

placing politics. A recent survey reported that 81 percent of companies use trend-based

projections, 41 percent use activity based management (i. e., linking financial forecasts to

nonfinancial data), and 22 percent use simulations.

As a result of better data, better forecasting techniques, and shorter planning cy-

cles, many companies now have more accurate and useful financial plans.

Sources:Fritz McCormick, “Fewer and Fewer Beans,” CFO,October 1999, 18; Susan Arterian, “Sprint Retools the

Budget Process,” CFO, September 1997, 88–91; Russ Banham, “The Revolution in Planning,” CFO,August 1999,

46–56; and Cathy Lazere, “All Together Now,” CFO,February 1998, 28–36.

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