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huronconsultinggroup.com : Set overall long-range goals and objectives. These are are These goals and objectives. long-range Plans: Set overall Strategic in nature. quantitative and both qualitative are often to a three over these set financial targets Plans: Typically, Long-Range for the plan the quantified financial comprise and they horizon, 10 year may years) five to three (i.e. time horizon A shorter plan above. strategic change. of extreme is in a state a company where appropriate be more plan and provides year of the long-range is the first Annual Plans: This guide the budget. to targets the high level the direction stating for and process venue the overall Planning provides together companies put Most of an organization. and financial objectives This plan of the company. strategic is part of the larger an annual plan that In a is possible.” “what out their vision for lay the senior executives is where may timeframes is in question, survival where company, deeply distressed in these view maintain a long-term it is critical to However, be compressed. goals. long term tactics do not overpower short term so that situations main or three of two composed is commonly planning picture overall The components: • • • What is PBF? often are sets of activities that unique is actually three PBF process The together: grouped WHAT IS THE POINT OFPOINT PLANNING, IS THE WHAT BUDGETING ? AND IF YOUR ESPECIALLY SURPRISE YOU, MAY THE ANSWER IS UNDERPERFORMING. COMPANY ANDERSON AND RAYMOND JEFF RADTKE BY: is a process (PBF) Planning, Budgeting and Forecasting The often is time consuming, department function that are that companies For disliked. and generally misunderstood, for as the foundation can serve the process and healthy, growing and financial planning. However, operational, strategic, long-range it is especially or turnaround company in an underperforming be the basis of the and may profitability improving critical to is is it needed and what why So, of the company. or failure success whom depending on varies answer The accomplish? it supposed to referring. are which aspect of PBF you and to talking to, are you THOUGHT THOUGHT THOUGHT LEADERSHIP WHAT IS THE POINT OF PLANNING, BUDGETING, AND FORECASTING

BUDGETING BRINGING IT ALL TOGETHER Budgeting supplies the execution path for the The PBF processes are in fact related but they are plans with a detailed, operational and short-term also distinctly different. Recognizing this is part view. Planning provides “what is possible;” budgets of understanding the overall purpose behind the outline “what is expected” from the business, general process and what types of improvement based on the approved annual plan. Budgets are opportunities exist. In fact, there are significant absolutely critical in monitoring historical progress points of view and multiple studies that outline all and adjusting activities or implementing new the various issues with the overall PBF process; activities to meet turnaround or profitability goals. however, few have tried to answer the fundamental question: what is the main purpose of the overall The budgeting process is broadly focused on PBF process? Here is an example that helps to the following major components: answer the question:

• /Gross Margin Budgets A few years ago, Huron Consulting Group met with a client reviewing its P&L and associated cash flow • Capital Expenditure Budgets forecast. The company was historically profitable • Headcount Budgets with strong cash flow. We thoroughly examined the income statement and all the forecasting • Operating Expense Budgets logic as well as ties to performance improvement activities and were quite pleased with the FORECASTING forecasted profit and P&L-based cash flow Forecasts typically use actual performance implications (e.g. EBITDA). The forecast showed to the remainder of the current a nice trend of profitability and implied cash flow year’s performance. Rolling forecasts are the looked strong. Things started well. same concept but reset expectations for some predefined period, usually 12 to 18 months. We then reviewed the balance sheet. Like most However, shorter 13-week timeframes with a organizations, the forecasted balance sheet focus on liquidity rather than Generally Accepted was relatively simplistic and not substantially Accounting Principles (GAAP) are needed in a integrated with the income statement. Our analysis distressed company environment. Forecasts focus of the balance sheet quickly revealed major on what is happening from a revenue and income problems. The “forecasted” accounts receivable statement perspective. balances were lower than they had historically been. Conversely, accounts payable balances were There are three general forecasting methodologies: higher than they had ever been. Inventory levels were too low. These working capital components • Top-Down Forecasting: Primarily focused on just didn’t make sense when compared to history current demand and operational conditions and the forecasted income statement. translated into revenue .

• Bottom-Up Forecasting: Rely on business This analysis of the balance sheet in a larger managers to enter current and specific line item context led us to discover discrepancies in the details per the revenue budget. current forecast assumptions and logic. Even though we had a sound P&L forecast, it did not • Hybrid: A combination of the above two properly provide insight to the cash needs and/ methodologies, e.g., a top-down focus coupled or forecast. This lack of a dynamic relationship with a bottom-up proportional allocation. between the two financial statements becomes

2 THOUGHT LEADERSHIP WHAT IS THE POINT OF PLANNING, BUDGETING, AND FORECASTING

an even greater issue when trying to run scenarios. are important in all companies, but critical in a The above example was point in time; imagine turnaround where cash acts as a lifeline for the running multiple versions of the P&L numbers future survival. and trying to ensure everything continues to make sense! Many clients struggle here but this type Key characteristics of a financial plan include: of analysis is fundamental to providing better financial direction. It also is essential in highly • Ability to easily produce a complete set of dynamic situations involving underperformance fully-integrated, relationship-based financial or distress. statements that provide the comprehensive picture of financial objectives. This example illustrates a common gap in the • Ability to test the sensitivity of various condition PBF process. How were the overall financial assumptions across the full financials. implications being associated to the changes in the forecasted revenues? For lack of a better • Ability to quickly and accurately gauge the work- term, let’s use financial planning to describe this ing capital impacts of the operating activities. often overlooked, major PBF component. Proper financial planning demonstrates the effects of The following diagram shows how financial the operational plan components on cash flow planning fits into the overall PBF process: and overall financial position. These effects

Strategic Plan / Initiatives and Event-Driven Activities

Organic New Product Scenarios and Capital Structure S&P Downgrade Dividend Payout Launch M&A

Long-Range Plan (Strategic Planning, Target Setting, Project Planning, Capital Structure, Tops-Down)

Target Setting

Reforecast of Budget (Annual Operating Plan, CAPEX Long-Range Plan Planning, Labor Planning

Budget Setting

YTD Forcast (Assumptions, ACtuals Performance Reviews)

Rolling Forecast (Driver-Based Planning, Key Performance indicators i.e. Quarterly EPS)

3 THOUGHT LEADERSHIP WHAT IS THE POINT OF PLANNING, BUDGETING, AND FORECASTING

The three process components defined:

• Strategic Planning: A component of the “Plan- The “ideal” PBF incorporates financial ning” use case in the original PBF breakdown. planning and will: The strategic planning process quantifies the “vision” of the company and helps • Ensure that the strategic and/or long-range determine “what is possible.” is at a plans focus on integrated scenario analysis. very high level, is driver and scenario-focused, The ability to “stress test” plans and run multiple incorporates full financial statement impacts, and financial and operational what-if cases will produces the long-range plan. Analysis is most provide unique insight to “what is possible” as powerful here when external drivers are included well as better forecast ‘what is expected’. at the higher levels (i.e. long-range or strategic • Effectively balance “top-down” and “bottom-up” plan levels) and the lower levels (i.e. budgets points of view and forecasting methodologies. or operational plans) are integrated to shape Top-down projections apply a more centralized the outputs. view and can include many influencing factors • Financial Planning: Has a role in building the including market data, economic indicators and “budget” and the “forecast” and in general general product and customer trends. Bottom- terms, is the “top-down” version of the budget. up projections are accumulated from many con- The output from the financial plan is the input tributors and are more “inward” focused. to the operational plan. Scenario analysis, stress • Produce more than a great income statement. testing, working capital analysis and re-forecast- The financial impacts of the operational plans are ing of the full financial statements are the key best analyzed with integrated balance sheet and use cases. cash flow statements. • Operational Planning: The “B” in PBF and fo- So, again, what is the point of the process? cuses on “what is expected” while highlighting the accountability in the detailed cost structure. An optimized PBF process should provide an The operational plan is also the basis for the effective system of checks and balances on allocation of the “top-down” financial plans possible and expected performance from top and is at the lowest level of detail. to bottom and from immediate to long-term. Why is there generally so little focus on improved It serves as both scorecard and action plan for financial planning and/or having a , allowing management to implement planning process integrated with the overall operational change. It should also let management PBF process? The simple answer is that financial know in advance how much capital they will need planning is difficult and requires unique insight into and when they will need it. how the enterprise generates cash flow. Adding to the complexity, most packaged software Contact Huron Consulting Group today to see applications help to gain efficiencies in the PBF how we can empower your organization. components but do not address the financial planning attributes. Depending on the level of complexity and scope of the business, maintaining the required financial relationships within an Excel-centric environment can be cumbersome with a high of error.

4 THOUGHT LEADERSHIP WHAT IS THE POINT OF PLANNING, BUDGETING, AND FORECASTING

ABOUT THE AUTHORS Jeff Radtke, Managing Director Jeff has more than 20 years of finance and consulting experience and is the leader of the EPM consulting team. He is responsible for business development, client attainment, and working with clients to design and execute corporate and business unit problem- solving as well as develop program leadership. Jeff’s consulting competencies include improvement, business analytics, , business , and enterprise . Jeff can be reached at 312-663-7634 or [email protected].

Raymond Anderson, CTP, Managing Director Ray provides strategic leadership to clients facing challenges due to growth or financial distress. He has more than 20 years of experience in the areas of corporate turnaround, refinancing, loan workout, restructuring, and M&A. In financial advisory and roles, he has led more than 40 M&A transactions (including distressed and non-distressed entities), multiple private placements and bank financings, and a successful public offering. Ray has served as the President of six companies, as well as in various board member roles at both public and private entities across a diverse group of industries. Ray can be reached at 312-880-3172 or [email protected].

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© 2016 Huron Consulting Group Inc. All RIghts Reserved. Huron in a firm and not a CPA firm, and does not provide attest services, audits, or other engagements in accordance with standards established by the AICPA or auditing standards promulgated by the Public Company Accounting Oversight Board (“PCAOB”). Huron is not a law firm; it does not offer, and is not authorized to provide, legal advice or counseling in any jurisdiction.

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