Having Annual Planning Nightmares?

(Late nights in the office, Errors, Too much detail)

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Annual Planning Process is Wrong as Soon as the Ink is Dried

The annual planning process is part of the trifecta of lost opportunities for a corporate accountant.  The other two being the year-end accounts and the monthly accounts processes.  All three exercises keep the corporate accountant locked into processing and reporting leaving little time for added value activities.  It is interesting to note that we seldom get thanked for preparing the annual accounts, for controlling the annual budget process or for preparing the month-end accounts.

A two week annual planning process sounds impossible yet it is achieved.  It takes good organization and recognition that the annual planning process is not adding value.  Instead it is undermining an efficient allocation of resources, encouraging dysfunctional budget holder behaviour, negating the value of monthly variance reporting and consuming huge resources from the Board, senior management team, budget holders, their assistants and of course the finance team. At best you have a situation where budget holders have been antagonized, at worst budget holders who now flatly refuse to co-operate!

The Foundation Stones of an Annual Planning Process (Extract from whitepaper)

There are a number of foundation stones that need to be laid before we can commence a project on reducing the annual plan to two weeks.

  • Separation of targets from the annual plan
  • Bolt down your strategy beforehand
  • Avoid monthly phasing the annual budget
  • The annual plan does not give an annual entitlement to spend
  • Budget committee commit to a “lock-up”
  • Planning at a detailed level does not lead to a better prediction of the future
  • CEO makes a fast timeframe non negotiable
  • Built in a planning application – not in spreadsheets

Separation of Targets from the Annual Plan

It is so important to tell management the truth rather than what they want to hear. Boards and the senior management team have often been confused between setting stretch targets and a planning process.  Planning should always be related to reality.  The Board may want a 20% growth in net profit, yet management may see that only 10% is achievable with existing capacity constraints.  The performance gap should be reported to the Board so they can direct their attention to strategic decisions to manage the short fall.  The Board have every right to say the stretch target is the basis for the bonus.

Exhibit 2.1 shows where management have forced the plan prepared in March to meet the target set by the Board. Each subsequent reforecast continues the charade until in the final quarter reforecast, performed in March the following year, the truth is revealed.

Exhibit 2.1: Reporting what the Board want to hear


Bolt Down Your Strategy Beforehand

Leading organizations always have a strategic workshop out of town.  This session should be looked anticipated with a positive attitude.  Normally Board members will be involved as their strategic vision is a valuable asset.  These retreats are run by an experienced external facilitator.  The key strategic assumptions are thus set before the annual planning round starts, also the Board can set out what they are expecting to see.

It is important that the board and management separate out in their minds the difference between a target — for example, the board wants a $200m net profi t next year — and the annual plan forecast of $180m. It serves no purpose to lie to the board by fixing the annual plan to come up with $200m when you know it cannot be achieved. This is hiding the performance gap.

Avoid Monthly Phasing the Annual Budget

As accountants we like things to balance.  It is neat and tidy. Thus it appeared logical to break the annual plan down in to twelve monthly breaks before the year had started.  We could have been more flexible.  Instead we created a reporting yardstick that undermined our value to the organization.  Every month we make management, all around the organization, write variance analysis which I could do just as well from my office in New Zealand.  “it is a timing difference….” “we were not expecting this to happen”, “the market conditions have changed radically since the Plan” etc.

The monthly targets should be set a quarter ahead using a quarterly rolling forecasting process. This change has a major impact on reporting. We no longer will be reporting against a monthly budget that was set, in some cases, over 12 months before the period being reviewed.

The Annual Plan Does Not Give an Annual Entitlement to Spend

The annual plan should not create an entitlement, it should merely be an indication, the funding being based on a quarterly rolling basis, a quarter ahead  each time.

Asking budget holders what they want and then, after many arguments, giving them an ‘annual entitlement’ to funding is the worse form of management we have ever presided over.

Organisations are recognising the folly of giving a budget holder the right to spend an annual sum, while at the same time saying if you get it wrong there will be no more money.  By forcing budget holders to second-guess their needs in this inflexible regime you enforce a defensive behaviour, a stock piling mentality.  In other words you guarantee dysfunctional behaviour from day one!

The nine year old’s birthday cake

The annual planning process has a lot in common with the handling of a nine year old’s birthday cake.  A clever parent says to Johnny, here is the first slice, if you finish that slice, and are not going “green around the gills” and want more, I will give you a second slice.  Instead, what we do in the annual planning process is divide the cake up and portion all of it to the budget holders.  Like 9 year olds, budget holders lick the edges of their cake so even if they do not need all of it nobody else can have it.  Why not, like the clever parent, give the manager what they need for the first three months, and then say “what do you need for the next three months” and so on.  Each time we can apportion the amount that is appropriate for the conditions at that time.

Budget Committee Commits to a “Lock-up”

Most organizations have a budget committee comprising CEO, CFO, and two general managers. You need to persuade this budget committee that a three day lock-up, whereby the committee sits for up to three days,  is more efficient than the current scenario that stretches over months.

During the three day lock-up each budget holder has a set time to:

  • Discuss their financial and nonfinancial goals for the next year
  • Justify their annual plan forecast
  • Raise extra funding issues
  • Raise key issues (e.g., the revenue forecast is contingent on the release to market and commissioning of products X and Y)

Planning At a Detailed Level Does Not Lead To a Better Prediction of the Future

A forecast is a view of the future. It will never, can never be right.  As Harry Mills says it is better to be nearly right than precisely wrong”. Looking at detail does not help you see the future better, in fact I would argue it screens you from the obvious.

Whilst precision is paramount when building a bridge, ever small detail needs to be right, an annual plan should concentrate on the key drivers and large numbers.

Following this logic it is now clear that as accountants we never needed to set budgets at account code level. We simply have done it because we did it in the previous year.  Do you need a budget at account code level if you have good trend analysis captured in the reporting tool? I think not. We therefore apply Pareto’s 80/20 and establish a series of category headings which include a number of general ledger (G/L) codes.

Rules I have developed:

  • budget for an account code if the account is over 10% of total expenditure or revenue e.g. show revenue line if revenue category is over 10% of total revenue.  If account code is under 10% amalgamate it with others until you get it over 10%.  I call these categories.  Thus a category will have a number of account codes within it.  See Exhibit 2.2 for an example.
  • limit the categories that BH’s need to forecast to no more than twelve
  • select the categories that can be automated, and provide these numbers
  • map the G/L account codes to these categories – a planning tool can easily cope with this issue without the need for a revisit of the chart of accounts.

CEO Makes a Fast Timeframe Non Negotiable

The CEO needs to make a fast timeframe non negotiable in all communication with staff.

From the memo that goes out to invite Budget holders to the first annual planning workshop, the address of the attendees at the workshop, and the daily chasing up of the laggards during the three days Budget holders have to complete their annual plan the message is clear .  We want a ‘fast light touch’ annual plan.  ‘Fast’ in that the annual plan is completed in less than two weeks and ‘light touch’ in that unnecessary detail is avoided.

As part of this foundation stone, common templates are established to replace the myriad of spreadsheets.

Built in a Planning Application – Not in Spread sheets

Annual planning requires a good robust tool not a spreadsheet, built by some innovative accountant, which now no one can understand.  Often the main hurdle is the finance team’s reluctance to divorce itself from Excel. It has been a long and comfortable marriage albeit one that has limited the finance team’s performance.

Acquiring a planning tool is the first main step forward, and one that needs to be pursued not only for the organisation’s future but also for the finance team members’ future careers. It will soon be a prerequisite to have planning tool experience, and conversely career limiting to be an Excel guru.

Excel is a great tool for a one-off costing estimate done while awaiting your plane.  It is not and never should have been a building block for your company’s key financial systems.  As an annual planning tool it fails on a number of counts:

  • it has no proper version control, we have all burnt the midnight oil pulling our hair out wondering whether all spreadsheets are the correct versions!!
  • for every 150 lines there is a 90% chance of a logic error (from a recent study)
  • its lack of robustness (show me a CFO who can be confident of the number an Excel forecast churns out!)
  • it cannot accommodate changes to assumptions quickly e.g. what would you do if the CEO asking ”what if we stop production of computer printers, please tell me the impact by close of play today”, I suspect the best thing  would be to pray!
  • it is designed by accounting staff who; are not programmers, have not been trained in system documentation, quality assurance etc which you might expect from a designer of a core company system.
New planning tools are being built all the time and this table, on Exhibit 2.3 is certainly out of date at the time of you reading it.  The table is not intended to be a comprehensive list as this would be a paper in itself.  The following “search strings” will help unearth many applications:
  • “planning tools”
  • “quarterly rolling forecasting” + “applications”
  • “forecasting tools” + “rolling”
Exhibit 2: Some of the planning tool providers and their applications

Company Package Name Web address
Adaptive Planning Adaptive Planning Software www.adaptiveplanning.com
Alight Planning Continuous Planning & Scenario Analysis www.alightplanning.com
BOARD International BOARD www.board.com
Castaway Castaway www.castawayforecasting.com.au
Business Forecast Systems, Inc forecastpro www.forecastpro.com
Epicor Epicor Financial Management solutions www.epicor.com
Host Analytics Host Analytics www.hostanalytics.com
Infor Infor PM www.infor.com.au
IBM IBM® Cognos® TM1™ www-01.ibm.com
Maxiplan Maxiplan cascade Planning www.maxiplan.com.au
Microsoft Dynamics GP Microsoft Forecaster www.microsoft.com/en-us/download/details.aspx?id=10707
Mondelio Mondelio www.mondelio.com
Oracle Hyperion Planning www.oracle.com
Planguru planguru www.planguru.com
PROPHIX Software Inc. prophix10 www.prophix.com
Rocket CorVu CorVu Rocket software www.corvu.com
Sage Winforecast Professional (Sage 50 Forecasting) www.sage.com
SAP Business Objects www.SAP.com
SAS SAS for performance management www.sas.com
Visual Cash Focus strategicfocus www.strategicfocus.co.nz


The key steps to making a good selection process include:

  • workshop the QRF process using a focus group
  • seek approval of draft proposal from the focus group
  • research planning tool providers and prepare a short list thus avoiding a request of information (RFIs) unless you want to handle over 60 RFIs
  • establish selection criteria and issue RFP on preferred three suppliers
  • organise testing of the best two planning applications by contracting the consultants to model some of the required key features. Both teams should be paid a set fee so that you can keep the intellectual property developed
  • presentation to decision makers and the focus groups

See Appendix 3 for an example of a planning tool.

Exhibit : How Forecasting Model Consolidates Account Codes


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