Plans tend to be stated in financial terms, and look to the future. Most of the terms and measures used by planning, budgeting and forecasting are financial. As such, the responsibilities associated with planning tend to be financial, and resolve to the executive with responsibility for money. At the most basic level, plans tend to facilitate the continuous improvement necessary to survive or even to thrive.
This post is part two of a primer on epm analysis.
Plans, budgets and forecasts are found at all levels of the enterprise, and focus on one or more aspects of a business. Plans facilitate not only financial levers, but also the creation of goods and services, along with operating policies. The techniques of planning are but one aspect of effective planning. Effective planning starts with application of techniques. Techniques of financial planning are often applied in an expansive way (e.g., pro forma statements). Such expansive applications tend to be forward-looking and provide a vehicle to estimate actuals for the end of a forecast period. The more efficient and effective the planning system the more likely it will be to go beyond simple spreadsheets, providing detailed forecasts and budgets tied to accountability by automated processes with granularity of access and control (e.g., general, selling and administrative budgets). EPM systems are ideal in these regards. Planning with EPM often leverages existing systems (Essbase) designed to assess historical outcomes, allowing the EPM groups to support a larger audience. Planning EPM is the point of merging operating and financial plans into strategy (e.g., to drive capital structure, especially beyond internal reserves).
Financial planning with EPM is highly effective for rigorously generating “what if” scenarios. Financial planning with EPM tends to free resources for systematic analysis of assumptions and the possible outcomes. It is important to note planning seldom errs in one assumption at a time. For this reason, the relationships built into an EPM system facilitate scenario analyses, and rapid adjustment for unforeseen events (loss of a major customer, revelation of a super-secret new phone, et cetera). Time spent building Planning in an EPM system tends to reduce simulation expense and increase viability of scenarios. Effective EPM planning teams tend to include probabilities in a way that eases executive communication.
As with any software system, it is important to find balance. Simpler techniques, like spreadsheet solutions, may drive greater understanding of the business yet sacrifice rigor in creating cohesive, responsive strategy. Complex techniques in structured systems may drive rigor yet obscure understanding of the business by black-box functionality. Balance occurs when visibility is available into the carefully-defined, inter-related flows, spreads and inner workings of the EPM planning system. Whatever the format, while assumptions remain the same, different planning techniques should produce the same results. EPM financial planning should generate significant time advantage, and reconciliation efficiencies.
The next segment of this post on financial planning flies over the activities of an EPM system team following the completion of expansive planning around pro forma statements. It will discuss cash flow and cash budget as the likely beneficiaries of EPM team expertise. Cash flow tends to be the old “sources and uses” statement. The cash budget is most like a cash flow forecast without accrual accounting. As such, the cash budget directly impacts financing activity, and tends to be used by treasury for managing cash balances.