Value Driver Tree and Planning, Forecasting & Budgeting (Part 2)

by | Jan 18, 2019 | Value Driver Tree

In the previous blog, we took a quick look at the common challenges associated with planning, budgeting & forecasting as outlined below:

  1. It sucks in a lot of time & effort
  2. Too many details and too little value
  3. It is susceptible to market volatility & changes
  4. Promotes a culture of conservatism that reduces appetite for risk-taking

We’ll now explore challenge #1 a bit further, and explore how value driver trees can help.

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Many surveys have repeatedly shown that financial planning activities are complex, iterative and time-consuming. According to a survey of 500+ senior finance professionals, 42% of organizations take one to three months to complete their budget, and 32% take three to six months.

Value Driver Tree and Planning, Forecasting & Budgeting (Part 2)

How long does Planning & Budgeting take in your organization? Source: Integrated Performance Management, Deloitte Touche Tohmatsu 2014

A lot of this effort goes towards consolidating, summarizing, communicating, explaining & reviewing information. In another survey of CFOs, over 50% of respondents indicated that their companies spend an overwhelming amount of time & effort on five of the six core activities that are part of budgeting.

Value Driver Tree and Planning, Forecasting & Budgeting (Part 2)

How much time and effort does your company spend on various budget preparation activities?
Source: CFO Budgeting Survey, PriceWaterhouseCoopers 2012

Overall, there is a uniform consensus that the amount of time that goes into planning & budgeting is way too high to justify the value it delivers.

The amount of time that goes into planning & budgeting is way too high to justify the value it delivers

Leading companies have acknowledged this problem and have been paying attention on (a) simplifying the overall process and (b) automating parts of budgeting & forecasting activities. Even then, it continues to remain highly resource-intensive in many enterprises.

Best in class Finance organizations that have successfully revamped their planning processes can today complete a forecast in two (2) days or less and develop an annual budget in less than three (3) months with three (3) iterations or fewer. (Source: Realizing the value of Budgeting & Forecasting, PriceWaterhouseCoopers)

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Solutions such as Visual BI’s Value Driver Tree can help you cut down time spent on planning & budgeting in several ways.

Using Value Driver Trees, you can quickly define key planning parameters using a top-down approach before embarking on a full-blown bottom-up validation of targets. This ensures that there is consensus on high-level targets (for metrics such as target volume, prices, sales mix and variable costs), before the organization proceeds to create budgets in greater detail.

Enterprises have found that this balanced approach of combining top-down and bottom-up planning helps them leverage the best of both worlds. Using Value Driver Trees in the process:

  1. Encourages upfront target discussions: Value Driver Trees are excellent communication tools, with instantaneous & intuitive simulation capabilities that can be easily understood by senior executives in a meeting.
  2. Streamlines number of planning iterations: Since value driver trees help clarify expectations and arrive at benchmarks earlier in the cycle, and the teams have a frame of reference that they try to meet, thereby avoiding large deviations. This initial alignment saves time on planning iterations.
  3. Reduces the need for more time-consuming changes in bottom-up plans: These savings are significant when you consider that typical bottom-up plans leverage highly sophisticated and complex platforms such as SAP BPC or Hyperion, where each planning iteration expends a lot of time & resources.

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In the subsequent blog, we’ll look at challenge #2: Planning, forecasting & budgeting require too many details and deliver too little value.

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