Corporate Finance

Metric of the Month: Total Cost of Budgeting and Forecasting

Strong business partnering from finance helps ensure that the costs of planning, budgeting, and forecasting are well-spent.
Perry D. Wiggins, CPAJune 3, 2019

Plans, budgets, and forecasts can be some of the most valuable contributions that finance makes to the business. Ideally, they help organizations know what’s coming down the road and remain agile enough to respond to uncertainty and to keep the business moving forward.

At the same time, planning, budgeting, and forecasting activities all come with plenty of costs: among them, personnel, systems, overhead, and outsourcing. Are organizations getting their money’s worth when it comes to these processes?

For this month’s APQC metric, we examined the total cost for the process “perform planning/budgeting/forecasting” per $1,000 of revenue. As the bar chart, below shows, the costs of this process vary widely by industry. For example, the automotive industry, which reports the lowest median cost for the process ($.028), has very complex supply chains and intensive planning processes. The industry has learned to manage this complexity with good supplier relationship management characterized by tightly integrated planning. That helps to keep the costs of the process lower while continuing to deliver value for the organization and its supply chain partners. The median cost for each industry reflects these unique challenges, opportunities, and complexities.

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Cost, however, isn’t everything. It would be misleading to suggest that best practice organizations are always those that spend the least on the process, while those that spend more are struggling. The goal of the process is to produce planning, budgeting, and forecasting that helps provide guidance and decision-making support for the business. The key consideration is not necessarily how much organizations are spending on the process, but instead whether organizations are making better decisions. For whatever level of investment is made, are they getting what they paid for?

To determine whether the costs of are well-spent, organizations should benchmark their performance against the median for their industry. If your organization is spending more than the median, it should be seeing more value from the process as a result. If an organization isn’t seeing more value for higher spending on the process, it’s important to find out why and work to address it.

Partnering Adds Value

Best-practice planning, budgeting, and forecasting requires a deep understanding of the key drivers of revenue. In APQC’s case, for example, many of these key drivers revolve around our members. Our goal is to provide value for them by helping them to work smarter, faster, and with greater confidence. To the extent that we do this successfully, our members continue to renew their memberships and we gain new members.

Understanding the algorithms of the business means understanding how our relationships with members contribute to an ongoing economic stream and finding ways to enhance those relationships. Whatever a company’s value proposition is, a best-practice finance function will play a business partnering role by modeling the algorithms of the business and helping the business to focus on investments that drive it toward better performance.

APQC’s recent financial planning and analysis (FP&A) research has found that best-practice organizations embrace a wide range of emergent technologies and leading practices to make their planning, budgeting, and forecasting effective.

For example, automation, machine learning, and cloud computing are all helping organizations to reduce or eliminate the non-value-added work of data collection. FP&A leaders at best-practice organizations also report that practices like rolling forecasts, scenario-based planning, and predictive analytics empower FP&A to deliver higher-value decision-making support and allow their organizations to be more agile in the face of change.

Embracing these emergent technologies and leading practices in planning, budgeting, and forecasting also empowers FP&A to be more valuable to its business partners. APQC has found that key stakeholder satisfaction is an important (though frequently overlooked) qualitative measure of FP&A’s effectiveness.

To determine whether the cost of the process is a good investment, FP&A should be in frequent conversations with the business about whether the outputs of the process are truly helping leaders to make better decisions and to better understand what lies ahead. Doing so is beneficial for the business and for FP&A alike: strong business partnering and close collaboration with business leaders give FP&A teams an important seat at the decision-making table.

When FP&A plays a strong business partnering role and is in frequent conversations with the business, the challenges, opportunities, and pain points of plans, budgets, and forecasts become visible quickly. The good news is that when FP&A and the business work together to address these, the costs of the process are worth the value. The improvements that flow from a strong business partnering relationship result in planning, budgeting, and forecasting that truly help drive the business toward better performance.

Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston.