Most companies don’t reforecast on a monthly basis because the “Forecasting” tools are not connected to their “Budgetting” tools.
The human brain couldn’t possibly make sensible judgments about hundreds of lines of data. To get a sensible picture of the options for the future the executive team has to work at a level of abstraction.
In other words, to capture the team’s judgment it’s necessary to use what we usually refer to as “Business Drivers”. This part of the “Perceptive Process” is usually referring to as “Forecasting” (as opposed to Budgeting).
The starting point for Forecasting using Business Drivers is an aggregation of actuals, which are probably held at a very detailed level in a set of ledgers.
After the Forecasting process has concluded with a top-level view, the FD has the task of spreading it back to a detailed line-by-line budget, because individual managers will need to be measured on whether they did what they were given the authority to do, item-by-item (e.g. hire no more staff, buy no more assets, and commit no more expenses than they were allowed
Once the annual budget has been set, most board of directors would ideally like to review and reforecast every month by going through the same process with the benefit of a new month of actual data.
However, in practice companies very rarely reforecast on a monthly basis, because of the time-cost of doing so. In other words, because of this technology constraint, businesses are often less effective and expose themselves to more risk than they need to.
Ideally Forecasting and Budgeting should be two parts of one-and-the-same process. However they often are not because the two parts of the process require different technologies: Forecasting is best done in “Rugged Excel” – i.e. either using Rugged Logic or a else professionally hand-built custom workbook (with associated cost and risk). However, although Budgeting be done well in Excel for small companies, for large, complex or diverse companies it’s better done with a database.
In practice, up to now, most people have done both in “Unrugged Excel” (i.e. spreadsheets hand-built by people who have other things to do in their day jobs). This is dangerous and costly because it consumes huge amounts of time to build a model at all well, and even then many surveys have shown that 95% of corporate spreadsheets contain at least one significant error
For simple company structures (e.g. when the entire Budgeting part of the process is done just by one person in one place, and there are no subsidiaries to consolidate):
Holding the “Detailed Budget” data in Excel is usually satisfactory. This enables a tight integration of the Budgeting with the Forecasting, which should be done in some form of “Rugged Excel.
For more complex company structures, where many people are involved in the Budgeting part of the process (the pushing down to the detailed level of the objectives set in the Forecast Scenarios), a database is indispensable to handle the workflows and the shear volume of data.
This requires that the Forecasting part of the solution (e.g. Rugged Logic model), and the Budgeting database, communicate in both directions:
BEFORE FORECASTING: To aggregate or Conceptualise the detailed actual data into Business Driver form
AFTER FORECASTING: To expand or Budget the top level forecast scenarios back down to the detailed data level.
This linkage can be done now, either manually, or automatically using custom ODBC drivers. However additional added value may be created in the future by tighter integration at a technology level between Rugged Logic solutions and industry-leading databases.
Tony Sparks
Paul Druckman
Geoff Bristow
Nick Bowles
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