Dynamic financial planning for real events, not the calendar

Many businesses stumble in their financial planning. To cite just one example, consider how Peloton, the exercise and training equipment company, made very optimistic forecasts of consumer demand, assuming that the increase in demand during the COVID pandemic -19 would last. The problem was compounded by a gummed up supply chain that deterred potential new customers.

Peloton’s planning was not flexible enough to quickly adapt to changes in demand and supply. The result: a big new factory that he will never use and have to sell, and a drop in market capitalization from nearly $50 billion in January 2021 to $3.3 billion in June 2022.

Michel Heric

With the risk of recession increasing, businesses in most industries will see their financial planning processes put to the test in the coming months. They would do well to replace a fixed annual exercise with a flexible approach that responds to changing conditions. Traditional planning methods have resulted in businesses being caught off guard by external shocks and unable to adapt quickly or reallocate money and other resources.

These traditional methods create headaches for financial executives. In a new Bain survey of 240 CFOs in the United States and Europe, respondents overwhelmingly cited financial planning and analysis (FP&A) as their top priority. A good FP&A team understands where money is being made or lost in the business and helps senior executives see around the corners while highlighting risks and opportunities within and outside the organization.

Stephen Beam

To do this, a company’s financial planning must excel in five outcomes: accuracy, timeliness, flexibility, innovation and value. Achieving consistently high levels of these results is difficult, with only 13% of CFOs in our survey saying they do.

To go beyond budgeting

Beyond Budgeting, a framework developed as an alternative to traditional annual budgeting, helps companies cultivate dynamic financial planning. Beyond Budgeting was born in Europe in 1998 and has been adopted in whole or in part by a wide range of global companies, including Toyota, Danone, Maersk and Handelsbanken. Beyond Budgeting consists of six leadership principles and six management processes.

In our survey, the 13% of companies that lead in financial planning key results are twice as likely as other companies to adopt many of Beyond Budgeting’s management principles and processes. The gap between leaders and others is particularly wide in a few key areas. For starters, leaders minimize hierarchical control and bureaucracy. Too many companies build a lot of detail into the resource allocation process, sometimes down to the department or manager level for operating expenses, or down to the individual project for capital planning. Leaders, on the other hand, streamline the level of planning detail.

Anup Juneja

Planners also organize processes based on business conditions and events rather than the calendar year. Some companies provide access to financing outside of the annual plan, in order to finance innovation initiatives or “business changes”.

Planners also excel at setting goals. Many companies choose the seemingly easy route of basing next year’s goal on a percentage of the current year. However, internally negotiated fixed goals do not work in dynamic situations. Instead, leaders set goals based on benchmarks tied to business strategy, and they often separate goal setting from planning and forecasting. This allows them to focus more on conquering the market than on achieving internal objectives, and offers a realistic vision of the actual performance of the company.

New looks for planning

Companies can streamline the current planning process, supplement it with new techniques, or reinvent the process. The first two can be effective in the short term, but for lasting benefits, some companies are adopting entirely new planning methods.

Amazon, for example, has reinvented the budget process by putting customer priorities at the center. It allocates funds to activities, not business units, with each activity being assessed based on its impact on customers. For each new business, the owner creates a planning document that contains a future press release outlining the benefits for customers. Unlike traditional management reviews that focus on financial metrics, Amazon reviews focus on real-time customer metrics.

Combining the right processes with the right talent and the right technology to create truly dynamic financial planning will allow businesses to quickly and confidently adapt to the shocks that come their way.

Hilti, a Swiss manufacturer of building products for the construction industry, began moving away from traditional budgets more than 15 years ago. Hilti initially set many of its goals as relative rather than absolute and tied its bonus system to progress toward those goals. It replaced annual budgeting with three rolling forecasts per year, each with just 100 positions.

Hilti’s performance management focused on comparing actual financial performance with performance in a prior period against established targets. From 2011 to 2021, Hilti was able to adapt its financial planning amid power tool industry disruptions, a global pandemic and supply chain shocks as revenue increased 1x .5 and net profit by seven during the period.

To improve planning, FP&A will need to add people from backgrounds beyond accounting and standard MBA programs, such as data analytics and data science. This kind of talent can help extract key business insights from data, rather than spending time fiddling with spreadsheets. Combining the right processes with the right talent and the right technology to create truly dynamic financial planning will allow businesses to quickly and confidently adapt to the shocks that come their way.

Michael Heric is a Partner, Steve Beam is an Expert Partner, and Anup Juneja is an Associate Partner in the performance improvement practice of Bain & Company. Heric also leads the business support solution in this practice.