Metric of the Month: Planning, Budgeting, and Forecasting Costs

The metric is closely tied to the intense demands being placed on finance teams to drive effective organizational decision-making.
Michael HinsonJuly 11, 2017

Today’s organizations are laser-focused on sustainable, profitable growth. To achieve it, they need top-quality business performance management, with a special focus on planning and management accounting. That puts CFOs in the hot seat, as finance and accounting are now expected to deliver strong competencies in financial planning and analysis, while facing intense pressure to work ever faster and more efficiently.

METRICOFTHEMONTH2It can sometimes feel like running full-speed on a treadmill, with little opportunity to jump off, step back, and tune up the machine. But that’s exactly what needs to happen if CFOs want to improve performance. To work smarter and deliver better-quality information to support organizational strategies, you must first take stock of how your finance organization is performing now, compare your performance to the best in the business, and then adjust your course accordingly. In other words, you need to find the time to benchmark.

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In finance, the key performance indicators to examine fall under three main categories: costs, staff productivity, and process efficiency. Benchmarking your performance in these areas against other finance operations can help you pinpoint what you need to improve, while others’ best practices can serve as a shortcut to faster performance improvement.

My company, APQC, has for years maintained a storehouse of just such benchmarking data. It’s called the Open Standards Benchmarking database, and one metric in particular recently jumped out at me because it’s so closely tied to the intense demands now being placed on finance teams to drive effective organizational decision-making. It’s the cost of planning, budgeting, and forecasting as a percentage of revenue, as depicted in the graph below.

Total Cost of Planning/Budgeting/Forecasting as a Percentage of RevenueJULYMETRIC OF THE MONTH

Among the 1,257 organizations that provided information about this benchmarking assessment topic, the top 25% spend – at the most – just .02% of revenue to develop periodic plans, budgets, and forecasts. The lowest performers spend more than four times as much, shelling out .09% of revenue to perform the same functions.

These figures include all the costs incurred at the business-entity level, whether at the unit level or at the parent organization, to meet organizational performance goals. It’s a mission-critical process that requires not just people to do the work, but also systems, overhead, and other internal and external expenses.

APQC’s benchmarking data also nails down just how much organizations are spending on people to perform this process. The top 25% of performers spend, at most, $105,263 per full-time employee to perform the planning, budgeting, and forecasting process. The bottom quartile spends almost twice as much, or more, from $200,000 per FTE and up.

Regional variances in compensation do come into play here. But what hits the budget harder is the staff size required to do the job. In addition to salary and benefits, every FTE also comes with overhead costs, including the systems needed to gather, extract, and scrub data.

How are the top performers able to do the same work for so much less? They have figured out how to work more efficiently.

Migrating to cloud-based systems for some or all aspects of business performance management can also help keep costs down. While there’s an ever-present pressure to accomplish more with a leaner team, CFOs also face increasing demands to improve analytical support to operating managers. Yet, all the high-tech finance systems in the cloud cannot replace the brainpower of key finance professionals who know organizational strategy, understand the business and market pressures, and can factor it all together to provide reliable and highly relevant decision support.

Cost Isn’t Everything

Some CFOs would be quick to point out that what matters isn’t how much this process costs, but what it delivers. After all, the goal is to provide maximum value to finance’s most important internal constituents: the operating managers. As organizations work harder than ever to deliver sustainable, profitable growth, it falls to finance and accounting teams to give internal leaders sharp business analysis, precise forecasts, and solid advice.

How can you tell if the money you’re spending on planning, budgeting, and forecasting is worth it? Ask the people on the receiving end of your monthly or quarterly performance tallies. Find out whether the intelligence you’re providing helps operating managers make informed decisions about fixed vs. variable expenses in future quarters. Ask what information would help these unit leaders pull the right levers to keep their business units on track and support the overall marketplace mission.

Then take that information back to your team and talk through your process for planning, budgeting, and forecasting. Break down the steps of what you’re doing now, and map it out as a flow chart. Think about where you could add or adapt steps to generate the information the business unit leaders are asking for.

Do some benchmarking of your finance organization’s performance in these areas, and look for best practices in performance goal setting, tracking, and forecasting. Find out what the business analysis pioneers are doing. Borrow what works for others, and make it your own.

It can be difficult to push beyond “We’ve always done it this way.” But the way you’ve always done it may no longer be enough in your current business climate. As you re-examine your processes, you’ll likely discover ways to create better information more efficiently, which can help you bring overall process costs down – even if you add new deliverables. But whether you cut costs or simply break even, remember: The value you deliver to your operations leaders can far outweigh the money you put into producing quality decision support.

Michael Hinson is CFO of APQC, a non-profit benchmarking organization based in Houston.