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Financial planning isn't rocket science

Financial planning can be made more accurate by ensuring department heads understand budgeting

30 Jan 2013

By Charlotte Vitty

FD rocket science by Bill McConkey

FINANCIAL PLANNING is a critical part of any FD’s role, and accurate forecasting is essential in driving a business’ performance, but many continue to see it as an inaccurate process.

More than three-quarters of respondents to a PwC report said budgeting at their company takes two months or longer. But why is this the case and how can we improve the procedure?

Perhaps the biggest challenge to forecasting is ensuring that departmental heads take ownership of their budgets and are accurate when preparing them. Because they are not trained in finance, their budgets are often incomplete. Many are too bullish or too prudent, or only think of the more direct costs, rather than relevant overheads. For example, if they have budgeted for new staff, salary costs will be included in their forecasts, but computers, stationery or the extra rent required to accommodate the new staff will not be.

FDs must explain to department heads that it is their responsibility to drive their department budgets. This might mean changing the culture in their organisation – so managers understand the value of budgeting, clarifying that the FD’s job is to compile and communicate an overall business forecast. Department heads are usually the people with the ability to provide FDs with accurate information.

Regular review meetings are essential – if there are inaccuracies, department heads understand where and why they went wrong. This means they are more likely to compile accurate forecasts in the future. In addition, any changes made to the business plan, and their implications, can be discussed immediately.

At Instant, we run a rolling forecast, which is updated on a monthly basis. This means we always have a budget prepared for the next twelve months, and are never updating an old forecast. It leads to greater accuracy as assumptions are updated and replaced with more accurate ones.

In a tough economic climate, more suppliers are now requesting accurate forecasts rather than statutory accounts. Although rolling forecasts do take time and resources, and can be more difficult for smaller finance teams to compile, I would recommend them as this approach is much more efficient in the long term.

Another reason for inaccurate forecasts is that businesses do not have a handle on variable costs. Costs for equipment and property can be unpredictable and the key is to fix as many as possible. Most businesses have some non-core activities that can be outsourced for a fixed price, at a similar cost to carrying it out themselves.

For instance, managed offices are a great way to fix all property-related costs. Utilities, cleaning and maintenance are consolidated into fixed payments, which is beneficial as these tend to be the hardest costs to predict. This is particularly true for companies requiring cash buffers to prevent them from dipping into their overdrafts.

The macro environment is another challenge to accurate planning. Clients will be affected by different conditions and many will wait to hear government policies relevant to them before making expenditure. Therefore, keeping up with regulations that affect your clients can be useful.

It is also essential to understand the growth requirements of shareholders and investors. There is a fine balance between trying to please them with a budget and setting a realistic one. Any expected changes should be communicated early. If revenue will be lower than expected, you must explain why, and suggest a solution, such as cost-cutting measures, to address the problem.

Clearly, financial forecasting is not easy, but there are measures FDs can take to make it more accurate and efficient. A significant part of an FD’s role is to communicate with senior management, and to ensure they give focused input. Also, they need to regularly review forecasts, which should keep a tight handle on costs and lead to more accurate budgets.

Charlotte Vitty is finance director of Instant

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