Hyperion Planning

The Challenges of Hyperion Support - Part 3: Managing the Process and Workflow of the Finance Office (Continued)

The Bean Consulting Group

Budgeting and Forecasting

Budgeting

Businesses plan financially using budgets, typically over a one year time period, where an attempt is made to forecast its revenues and allocate its expenses over the year.  The goal is to insure that the business doesn’t spend more than it makes. – that is, that it’s profitable.  During the “budgeting season” management typically relies on "budget to actual" variance reports which display budgeted amounts contrasted with the actual amounts spent in order to assist in making decisions about the upcoming year.

Some of the more common methods for budgeting are incremental budgeting, zero based budgeting, and driver based budgeting.  We will briefly discuss each below, along with when and how they are used, and how the Oracle Hyperion products are used in support of these processes.

Incremental Budgeting

Incremental budgeting is budgeting based on slight changes from the preceding period's budgeted or actual results. This is a common approach in the public sector and businesses where management does not intend to spend a great deal of time formulating budgets, or where it does not perceive any great need to conduct a thorough re-evaluation of the business from the ground up. This mindset typically occurs when there is not a great deal of competition, and where revenues tend to be perpetuated from year to year.

There are several advantages to incremental budgeting, which are as follows:

• The primary advantage is the simplicity, since it is based on recent financial results or a recent budget.

• The second advantage is stability, both from a “funding” perspective, and also from an “operational” perspective.  If a program requires funding for multiple years in order to achieve a certain outcome, incremental budgeting is structured to ensure that funds will keep flowing to the program; and this approach will also ensure that departments are operated in a consistent and stable manner for long periods of time.

There are however several downsides to incremental budgeting that make it a less than ideal choice. These downsides include:

• As the name implies, is it incremental in nature, which means it assumes only minor changes from the preceding budget, when in fact there may be major structural changes in the business or the business climate that call for much more significant budget changes. And, when the budget is carried forward with minor changes, there tends to be little incentive to conduct a comprehensive review of the budget, so that inefficiencies and budgetary slack are automatically rolled into new budgets.

• Incremental budgets fosters an attitude of "use it or lose it" in regard to budgeted expenditures, since a drop in expenditures in one period will be reflected in future periods; and managers tend to build too little revenue growth and excessive expenses into incremental budgets, so that they will always have favorable variances.

• Since an incremental budget allocates most funds to the same uses year over year, it is difficult to obtain a large funding allocation to direct at a new activity.  Thus, incremental budgeting tends to foster the status quo, and doesn’t encourage risk taking, which can mean death in some industries.

These downsides might lead one to the conclusion that incremental budgeting can lead to such a conservative mindset that the budgeting process itself may actually be a driver in killing the company over time.  Alternatively, businesses can engage in a thorough strategic re-assessment of the business from the bottom up when constructing its budget.  This notion of what is commonly referred to as zero based budgeting, forces a detailed investigation of expenditures, and can result in significant changes to the allocation of funds from period to period if the business conditions justify such re-allocations.

Zero Based Budgeting

As we’ve mentioned, zero-based budgeting is an approach to planning and budgeting decision-making that reverses the traditional process of incremental budgeting - where departmental managers justify only variances over prior "baseline approved budgets”.  By contrast, in zero-based budgeting, every line item of the budget must be approved, rather than only changes to line items.  Zero-based budgeting requires that budget line item requests be re-evaluated thoroughly every budget cycle, starting from an assumption of no allocation of funds, and an evaluation of the line item’s expense contribution to the business’s overall strategic objectives.

The next step in budgeting is to “marry” these budget requests to targeted operational changes that are intended to improve the competitive position of a business, and we have driver based budgeting, the last and final type of budgeting we will discuss here.

Driver Based Planning

Driver-based planning is an approach that attempts to identify an organization's key business drivers, and uses those drivers as key inputs to business models that calculate how those inputs impact an organization's success.  The goal of driver-based planning is to focus business’s resources into those things that are most likely to drive success.

Identifying business drivers is tricky when done subjectively, and people within the same organization can have different perceptions about what the key drivers for the business’s success are.  This is why driver based forecasting can provide an objective mechanism to measure which drivers are most strongly correlated to the business’s success.  The driver based models can be created levitra sin receta with spreadsheets like Excel, or with more advanced data modeling software applications such as Oracle Hyperion Planning (just to name one). 

The concept of driver-based planning was gained notoriety in the movie MoneyBall; the film, based on the book by Michael Lewis, was a true story about how the Oakland A’s assistant general manager used statistical analysis to identify the organization's key driver for success - on-base percentage.  Once this became a key driver in player selection, the A’s were able to successfully compete against other teams that spent much more on player payroll.

The most important aspect of driver based planning is that it aligns operational goals and forecasts with the financial forecasts, and provides potential leading indicators for the health of the organization as data is collected and compared against the “plan”.

Forecasting

Forecasting is a lot like budgeting, however, forecasting uses information regarding current financial conditions and expected future financial and operational conditions, to project a company's financial position, cash flows, sales and other figures into the future.  Forecasts tend to change over time as a company's financial position and other influencing factors change.

Forecasting and budgeting are both ways of preparing an organization for the future; however, budgets are typically prepared yearly, while forecasts are prepared more frequently – usually quarterly, or even monthly.  Forecasts tend to change based on financial conditions, whereas budgets are more concrete - once the budget is set, the organization will try to stick to it.  After the budget period is over, a review is conducted to determine areas where the budget was correct and where it was incorrect so that the next budget can be revised accordingly.  In short, budgets identify what the organization wants to accomplish; forecasts identify what can be accomplished given the current financial position of the company and the likely financial, operational and market conditions of the near future.

Of course many of the budgeting processes previously described can also be used in forecasting, such as driver based planning, etc.

Rolling Forecasts
Rolling forecasts are a method of planning that looks beyond the current financial year, and contain a minimum of 12 forecast periods (typically months) but can include 18, 24 or 36 or more.  Each time the model is “rolled” forward and updated with a period of actual results, the forecast is extended to maintain the required number of forecast periods.  This is depicted below:

The above example is a 12 month rolling forecast where the green cells indicate actual data being loaded into the monthly forecast, and an additional month being added as the forecast “rolls” from one month to the next.  And, at the end of the year, the rolling forecast becomes the budget for the next year.

Technology’s Part - Redux

Hyperion Planning

Again, according to Oracle, “Hyperion Planning is a centralized, Excel and Web-based planning, budgeting and forecasting solution that integrates financial and operational planning processes and improves business predictability.  Oracle Hyperion Planning provides an in-depth look at business operations and its related impact on financials, by tightly integrating financial and operational planning models.  With Oracle Hyperion Planning you can meet your immediate financial planning needs while enabling a platform for future cross-functional expansion and automated process integration.”

So what does that mean..??  Well, in short it means that Hyperion Planning has the functionality to do incremental, zero based, and driver based budgeting and forecasting; as well as the ability to do rolling forecasts – all the things that users in the financial planning and analysis (FP&A) group of the finance office want from a planning system.

And with Essbase as the underlying engine that powers Hyperion Planning, organizations have the ability to model complex business calculations can be achieved.  And this is where it all comes together hopefully… it’s important to understand the business model and the drivers to the business model, and how the organization supports and tracks those drivers to those business models that becomes so important.  Typically these will be operational measures will be tracked in the organization’s ERP system, or CRM system, or HR system, or some combination of these or other systems.  Pulling all this data together requires coordinated integration, which we will discuss in more detail in Part 4 of the series, Data Integration, Ownership and Security.  And, with this data in a system rather than in Excel spreadsheets, the data has controls and processes that can be reviewed and audited.

Just like the financial close process, the budgeting and forecasting process can have multiple steps that must be completed in a particular order, and may require approvals throughout the process that involve different people within the organization.  These processes can be simple in many cases, such as simple manager approval… and they can also be complex in nature that may require the involvement of multiple people from different departments within the organization to complete, may involve data from multiple sources, and which may be automated at times.

Enter Workflow and Task Lists, the two features that exist in Hyperion Planning which provide a mechanism for managing those aspects of the process.  Process Management (aka Workflow) allows administrators of the budgeting and forecasting process to define the approval processes required – both simple and complex; and, Task Lists allow the administrators of the process to build a “business process”, or sequence of steps for budgeting and forecasting users to follow.

Conclusion

In conclusion, the importance of understanding the “why and how” of the use of the Hyperion suite of tools is critically important in supporting Hyperion applications and environments, particularly when these financial cycles are considered against the additional IT requirements of performing upgrades and maintenance to software and infrastructure that support the applications.

In addition, the use of the Process Management and Workflow tools available in the Hyperion suite of applications can be extremely valuable in managing the financial processes of an organization.

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