Another one quarter, it will be time to switch on the crystal ball. Apart from a host of budgeting techniques, business drivers based planning and predictive analytics in planning, are becoming the latest tools for CFO's and analysts.
In its traditional form, which most companies follow, Planning and Budgeting work in the time tested manner. In some cases even Plan and Budget are treated as one and the same. Budgets are made, sometimes by chart of accounts, and after few handshakes, it goes through acceptance. For companies which have devoted attention to this area, analysis is made more rigorously. Sometimes adopting techniques like Zero Based Budgeting to challenge basic assumptions.
For large companies with complex operations and geographical spread, planning and budgeting solutions are implemented to break down individual constituents. This allows cohesive management of the planning / budgeting process (through workflow etc) and placing ownership with the respective functions.
These are just more efficient ways of conducting the exercise and enabling a better comparison of Plan Vs Actual subsequently. CAPEX is decided and cash flow adjusted. Forex is hedged to bring some uniformity. Volume & Pricing analyzed and adjusted by region, product line, business line to met Top Down objectives. Sometimes this is touted as business drivers based approach while it only amounts to only elaboration of the planning process.
The fundamental assumption in business continuity is that it will obey the known variables. Known variables could be within the span of control of the management or could be outside. The ones within span of control could be head count, market size, production capacity & constraints, etc and the ones outside are assumptions around economic outlook, crude price or dollar value etc. And these known variables are used to drive the plan and the budget follows. These are still not the business drivers.
What are business drivers then?
Let’s term them as activities and influencers, both internal and external, which have bearing on the performance. Let’s not consider black swan events which can overwhelm. For example... your sales is dependent on expanding your dealer network from the current level. This activity is measurable, achievable and has bearing on business result. Let’s consider, rising price of petrol. This can dampen sale of gasoline cars and / or increase sale of diesel powered ones. This can lead either revised product mix or reduction in price of petrol powered cars to stimulate sales. Another example is the rising interest cost bearing down on sale of vehicle. Manufacturers have an option of either subsidizing interest (higher variable cost) or trimming down production (lower marginal contribution).
There will be an argument whether these examples are business drivers or keys for scenario analysis. I think it all lies on how much this has been factored into the plan and budget. Less considered, more they will fall into scenario analysis and vice versa.
'Subbu' Balakrishnan | EPM and BI CoE
'Subbu' is a qualified Cost & Works Accountant, Company Secretary and Law Graduate, with more than 20 years experience in operations and IT.