Improving your financial fundamentals a matter of seven practical steps

Successful companies have a number of practices in common that enable them to succeed in the good times, and survive major downturns.

AS the world slowly recovers from a tremendous financial and economic shock of the GFC, market volatility is a major factor affecting companies as they attempt to improve their financial planning, budgeting and forecasting processes.

So what better way to improve these financial fundamentals than to look at the seven habits of the most successful companies?

Let your budget flow in both directions

Top-down budgeting - where the most senior management define the objectives of the company and then all levels below build their planning and budgeting off this vision - has its flaws.

While it can be the best way to ensure your company’s high-level goals are embedded within your plan, as anyone who has worked under this regime in a big company will testify, it also runs the risk of weak organisational buy-in and a lack of grassroots knowledge - making budget accuracy less feasible.

A bottom-up approach to budgeting encourages organisational buy-in and improves feasibility, as each department, function or division contributes to budget creation. But the major risk is that a grassroots-generated budget is not the best fit to help the company achieve its wider goals.

The most successful companies combine a top-down and bottom-up approach.

While more complicated to manage, it means you get the benefits of both methods without the common flaws. When supported with well-defined processes and good levels of automation, this approach is effective in linking the performance of all levels of the organisation to the wider company vision. This promotes a level of confidence and buy-in that makes that vision more achievable.

Get your financial house in order

No organisation sets out to have financial planning and forecasting delays because the new budget has not been finalised before the new fiscal period starts, but it happens.

Failing to sign off your new budget before the new financial period begins is usually a sign of more concerning lapses of financial control in the organisation.

In the most successful companies, the new budget is signed off in a timely manner.

This one measurement is a strong indicator of the likely success of an organisation’s overall financial planning processes.

Hold people accountable for budget accuracy

That’s pretty obvious, right? Of course you monitor budget performance and hold people accountable. It’s likely your management will have to explain why budget targets were not hit and goals not achieved.

But is that enough?

Is that enough of an incentive to gain a competitive advantage in your control of inputs and outputs?

For the best performing companies, the answer is no.

They know that there is a greater chance of improved financial planning performance when a manager’s personal interest is tied to budget accuracy.

The facts are simple: when bonuses and even job security are linked to budget accuracy, managers are more likely to make their budget as accurate as possible.

These firms achieve significantly better financial planning outcomes as a result. In fact, the best-in-class companies are five times more likely to link compensation to budget goals.

Keep your budget agile, on its toes

With the volatile economic conditions that prevail, agility in financial planning is key to decreasing risk and grabbing opportunities.

External and internal factors can greatly alter your ability to attain the goals you have set. So it’s hardly a surprise that having the ability to re-think and then re-forecast as market conditions change is a tremendous advantage.

By keeping agile and reacting to changing conditions, you ensure your forecasts do not become unrealistic over time.

Successful companies perform scenario modelling, including the capability to conduct ‘what if’ scenario and change analysis.

This type of analysis makes your financial plans more informed because they’ve taken into account and anticipated the effect of a range of possible events.

Put simply, this puts you in the fortunate position of being able to consider alternative scenarios and having the ability to change forecasts, plans and budgets mid-stream.

Improve the quality of your data

There are myriad ways to improve the quality of your financial planning input data.

Whether your budget is historically or performance based, the quality of your input data can significantly affect the quality of the output you achieve.

The best-in-class companies are much less likely to base budgets on historical data, instead focusing attention on budgets based on current performance (such as performance based budgeting).

This helps these companies to shift the focus from looking back to looking at the road in front.

Keep your eyes on profit, not just the budget

With this all said, it’s important to not get so attached to a budget that your most important consideration is its accuracy. This blinkered approach to financial planning can lead to serious flaws.

The best-in-class companies know that accuracy must be balanced with the need to improve or preserve profitability.

They know that, while budget and forecast accuracy is very important, it cannot be to the detriment of good business decisions.

In other words, the best-performing companies focus on the overall health and profitability of their business, rather than managing rigorously to a fixed budget.

They do see budget deviation as a serious issue (and a potentially grave threat to profitability), but they have this wider view of the financial planning process.

Modernise your processes with technology

There are three key areas where the use of technology can help you improve your current financial planning performance; and these are three areas that successful companies focus their attention on.

Firstly, best-in-class companies ensure that their people involved in the budgeting and forecasting processes are automatically guided through steps with smart applications.

Secondly, they ensure that events outside of the company (perhaps industry or financial indices) trigger an alert to make a forecast adjustment.

And finally, and most importantly, they use technology to automatically link internal events to financial planning activity. When a contract fluctuates, or a schedule is missed or an order lost (or whatever event it is), they automatically trigger an alert to adjust the forecast.

Just imagine what advantages this gives you, not only in budget and forecast accuracy but also in removing unnecessary layers of manual data handling.

Begin implementing these seven steps to your budgeting and forecasting processes; you can’t help but improve outcomes.

Observing, emulating and improving on the activities of successful companies are great ways to drive positive change to your financial planning. As the saying goes, if you keep on doing what you’ve always done, you’ll keep on getting what you’ve always got.

• Jeff Robson is the founding director and principal analyst at Access Analytic Solutions, which provides training in financial modelling for oil and gas companies throughout the Asia Pacific region.