“It was on 31 January last year that the inaugural London financial planning and analysis (FP&A) Club, supported by the Association for Financial Professionals (AFP), was established to share best practice, aid career development and advance the cause of effective planning and analysis in budgeting and strategic corporate processes,” said Club founder Larysa Melnychuk, a former group FP&A director at Invensys and European FP&A head at Combined Insurance (ACE Group), prior to her presentation about how best to implement a rolling forecast programme.
Melnychuk’s 45 minute speech last night at the Mountcalm Hotel in the City of London covered everything from culture to people; IT systems to design; to processes and cross-functional and departmental alignment and participation, identifying what she believes are the seven critical success factors for implementing an effective rolling forecast programme (see bullet points below for more detail).
“First though I want to highlight the FP&A Club’s plans for the year ahead,” said Melnychuk. “After successful spin-off events in Moscow, Kiev and Dubai last year, the Club will be expanding still further internationally with events planned for Sweden (in March), Switzerland and the Netherlands during 2014. As ever, all FP&A Club events are dedicated to sharing best practice among senior FP&A managers and finance and treasury professionals, and will provide a free networking forum where we can learn from each other at this critical moment of change for our profession.”
The growing preference within corporates for financial planning and analysis techniques, skillsets and indeed managers, taking advantage of the ability to plan more effectively, dynamically and strategically with new forward-looking data systems and risk/reward capabilities, is what is driving this “critical moment” in Melnychuk’s opinion. The trend towards FP&A’s rise up the corporate agenda can be seen via the addition of a dedicated FP&A track at the annual AFP Conference this November in Washington DC, which attracts almost 7,000 finance professionals, and the launch of a series of webinars this year. The latter are free to FP&A Club members and their equivalents at the US FP&A Roundtable forum, which apes the European gathering.
“Starting this year there is also the AFP’s FP&A certification programme. This is the first such dedicated, standalone FP&A certificate aimed at this specialist area. It has already attracted more than 100 people to take the first exams this year, from across 19 different countries, and is one more example of how this field is entering the mainstream.”
The London FP&A Club now has an advisory board too, which will be rolled out in other parts of Europe during 2014 as the FP&A Club expands across the continent. The London Club’s agenda involves three further quarterly meetings, starting in April, covering the topics of FP&A IT systems; developing effective teams and skills; and finally big data analytics at the end of the year.
Rolling Forecasts: The Coming Approach and Challenges
Returning to her presentation for the evening, entitled ‘Rolling Forecast Implementation: Seven Factors for Success’, Melnychuk asked the more than 30 senior FP&A heads gathered at the Mountcalm to raise their hand if their corporate already had a rolling forecast approach.
More than half the audience responded affirmatively, and the majority of the rest did so when Melnychuk asked if their corporate was planning to introduce it; thereby demonstrating the popularity of the budgeting approach, which can aid strategic planning, staff incentivisation and growth across the business if it is implemented properly.
Why should you use rolling forecasts instead of a traditional annual budgetary approach? Melnychuk quoted the famous saying from Bjarte Bogsnes, vice president of performance management development oat StatoilHydro: “‘During the budgeting cycle we shine a strong light into the future. Then we turn off the high beams and start driving into the next year with only low beams on’ – why would you want to do that?”
In addition, according to IBM research cited by Melnychuk, rolling forecasting can give you 12% more forecast accuracy, 50% less budget preparation time and 10% more profitability. But introducing it properly is not easy, with a supportive business culture a necessity to overcome the sometimes labour-intensive design and procedural change process, and work required to specify and align software and reporting systems with people and departments.
That is why 20% of corporates trying to implement rolling forecasts last year failed. Regardless, 42% of big corporates are now using rolling forecasts and the trend is still upwards because of the benefits. “Eighty-eight per cent still do traditional budgets, however, and run them alongside rolling forecasts simultaneously. This is often the cause of the failures,” warned Melnychuk, as she advised attendees from going down this path.
“Remember rolling forecasting is not a measurement tool, but a management tool, which shouldn’t be mixed up with your targets or follow your accounting structures – these are the two key messages that I want attendees to remember.”
Seven Key Factors for Success
The seven critical factors for implementation success when introducing a rolling forecast programme are:
- Culture: The cultural change needed to introduce rolling forecasts should not be underestimated, warned Melnychuk, citing Fritz Roemar of the UK clothing group Hackett, who believes it is the number one mistake many companies make. “You should win the support of top management and get the acceptance of all key participants before ploughing ahead,” she said, “and educate everyone that this is a management tool, not a measurement one that follows accounting structures.”
- People: “We need collaborative, creative people who see the big picture,” explained Melnychuk, referring attendees to the desired skillset outlined at the previous London FP&A Club advisory board meeting. “Rolling forecasting requires people who see, not the two other types of people identified by Leonardo da Vinci: those who see when they are shown; and those who do not see.” Good communication and people skills are vital in achieving buy-in and successful rollouts. “80% of US chief financial officers (CFOs) say it is difficult to find analytical people who are also good communicators; that is why we need a new generation of FP&A professionals.”
- Systems: Unfortunately, Excel still dominates for FP&A and other finance and treasury professionals. Excel is the one solution that everyone uses but it has well-known data entry and ‘fat finger’ mistake limitations, among other disadvantages, and it cannot match the flexibility and capabilities of more modern systems. The next London FP&A Club meeting and presentation in April from Michael Coveney [see preview here] will focus on the importance of technology, and assess the pros and cons of Cognos TM1 and other such solutions. Cloud-based computing approaches versus in-premise FP&A systems were also discussed at the Mountcalm last night.
- Process: The rolling forecasting approach should be quick, flexible and allow for collaboration, and it must minimise non value-adding activities, attendees at the London FP&A Club were told. Additionally, you should clearly allocate roles and responsibilities and ban adjustments to forecasts and “place-holders”, remembering that this is a management function and not a measurement tool. “You need to improve the A in financial planning and analysis (FP&A) and re-formatting the process is crucial to this aim,” said Melnychuk. “Design out biases too, so that where possible, business as usual (BAU) forecasting should be automated through drivers.”
- Design: The design of your rolling forecast programme will be critical to its success or otherwise, with Club attendees advised to look at their horizontal details, concerning reporting timeframes, and vertical details, regarding the stability and dynamism of the overall process. The speed and frequency of forecasting horizons across different industrial sectors was also discussed with airlines’ typical decision-making timeframe of rolling two quarters on a monthly basis, cited as a benchmark, versus engineering’s six quarters quarterly. “Only 20% of corporates have a forecasting process of less than 10 days; this needs to improve,” commented Melnychuk.
- Alignment: You need to align your strategy and your operations to successfully implement rolling forecasts, and to have IT systems that can handle bottom-up and top-down processes, all the while encouraging communication and collaboration among employees, departments and the boardroom. Traditionally, heads of FP&A have not been part of the top-level strategic planning process but this is changing and in answer to the question of who among the London FP&A Club attendees at the Mountcalm Hotel last night were involved in such high-level strategic deliberations at least a quarter of the hands went up; suggesting change is afoot.
- Participative Planning: Involving many people in the planning process can help to overcome the gap between strategy and execution, if they are properly trained. Modern FP&A IT systems and qualified professionals can help to manage the collaboration agenda. “FP&A professionals have to be a business partner, mentor and influencer – and to be independent from the CFO,” concluded Melnychuk before setting out her best practice guidelines.
Best Practice Guidelines
Melnychuk’s conclusions and best practice guidelines for introducing rolling forecasts consisted of advising attendees at the anniversary London FP&A Club event to focus on improving their forecasting frequency; to move from fixed to flexible budgets; and to always use risk-adjusted drivers if possible.
Additionally, moving from fixed performance measurements – for salesmen say – towards relative assessments against competitors or industry norms, was cited as best practice. “You should also focus on critical drivers, listing 10-15 at most, not hundreds and hundreds of drivers which can swamp users in details. You need to be able to check your drivers after all, so keep them at a manageable number.”
You will know you’ve been successful in your implementation efforts when you have the CARAT features of a good rolling forecast – i.e. the process is Timely; Actionable; Reliable, Aligned and Cost-effective (carat spelt backwards).
The key benefits will be better accuracy; more flexibility; quicker decision-making; and improved corporate vision and strategic planning.
Vox Pop: Reactions and Accessing Peer Knowledge
According to Bruce Trewhella, group FP&A manager at Idox, a software and solutions firm, the London FP&A Club anniversary event was extremely useful and well-timed from his perspective because he is presently responsible for rolling out a new rolling forecasting programme this quarter. “I am in charge of the project and currently doing extensive research and comparison analyses to ensure we’re on track and maximising the potential of this approach,” he told gtnews. “This is the first time I’ve attended a London FP&A Club meeting and I’ve found it to be both enjoyable and insightful.”
“The evening has provided a unique opportunity to meet fellow FP&A professionals from a range of different companies, both larger and smaller than my own. The challenges we face as FP&A professionals are often consistent across companies, regardless of size, and the London FP&A Club provides a good networking forum to discuss these challenges with people who may have faced the same issues as I currently am; and solved them in the past.”
• If you would like to find out more about FP&A and the plans for the AFPs’ certification programme please follow the highlighted link for more information, sign up to the AFP FP&A e-newsletter or visit the FP&A website. There are also gtnews FP&A Interviews available with FP&A Advisory Board member, Ash Sharma, who is head of FP&A at Alliance Boots Healthcare; Lewis Girdwood, head of FP&A at easyJet; Jeremy Dahdi, director of planning and reporting at Pearson; Fabrice Domange, senior vice president (SVP) and head of financial planning and analysis (FP&A) for Europe, Middle-East and Africa (EMEA) at AIG Property and Casualty, and Ricardo Losada Revol http://gtnews.afponline.org/Articles/2013/Q_A__A_Diverse_Background_for_a_Diverse_FP_A_Function.html, director of corporate finance at World Fuel Services. For those interested in reading more about the subject, please also visit the new gtnews FP&A section homepage.
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