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Is it time to rethink your spreadsheet based planning & budgeting

       
  • Planning
  • Thought Leadership

Is it time to rethink your spreadsheet based planning & budgeting

Is it time to rethink your spreadsheet based planning & budgeting

Benjamin Franklin said, ‘Failing to plan is planning to fail.'

This is all the more true for businesses given the context of the global uncertainty from a geo-political, environmental and business perspective. In today’s context, having no business plan is like contesting a sumo wrestling match blindfolded.

We all agree that financial planning and budgeting are essential for businesses to navigate the complexities of the modern business environment. What is also important is to adapt to changing times and plan and budget according to the latest market happenings.   

“In life, change in inevitable; in business, change is vital. 
- Warren G. Bennis

Can relying solely on age-old Excel help us navigate this business environment? The answer is ‘No’.

Small, medium and large enterprises are all embracing a modern approach to planning and budgeting, which is the Cloud FP&A. Sticking with the good old spreadsheets for planning and budgeting while competitors are moving to the cloud is like participating in the F1 races with a bullock cart while the competition uses modern, hi-tech, Ferrari.

What is so wrong with using spreadsheets for planning and budgeting? Before we get into that, let us have a quick look at what the planning and budgeting process looks like.
 

Steps involved in planning & budgeting.  

While each business has its own definition of the different steps involved in planning and budgeting for their organisation. Broadly, the steps include:

1. Establish goals and objectives

2. Gather data and Information

3. Revenue forecasting

4. Expense estimation

5. Budget preparation

6. Budget monitoring and control
 

Let us briefly look at what each one means.
 

Establish Goals and Objectives

The first step in the budgeting process involves setting clear, strategic goals and objectives that an organisation aims to achieve within a specific period, typically aligned with the fiscal year.  

This stage requires a deep analysis of the company's previous performance, comparing actual results with past forecasts, and understanding the reasons for variance. It's not just about setting financial targets but also about ensuring these targets support the company's broader mission and vision.  
 

Gather Data and Information

Once the goals and objectives are clearly defined, the finance team embarks on a comprehensive data collection exercise. This involves gathering internal data, such as historical financial performance, departmental budgets, and previous years' spending patterns, as well as external data, including market trends, economic forecasts, and industry benchmarks.  

This stage is critical for providing a solid foundation for accurate forecasting.  

Moreover, insights from various departments ensure that the budget reflects the needs and expectations of the entire organisation, not just a top-down financial target.
 

Revenue Forecasting

With a wealth of data at their disposal, the finance team uses financial models to project future revenues. These models take into account various scenarios, ranging from the most optimistic to the most pessimistic, considering factors like global economic conditions, changes in the competitive landscape, and shifts in consumer behaviour.  

This phase is crucial for setting realistic revenue targets that are ambitious yet achievable, providing a benchmark against which the company's performance can be measured.
 

Expense Estimation

Parallel to revenue forecasting, the finance team works on estimating the expenses the organisation will incur to achieve the forecasted revenues. This includes detailed analyses of fixed and variable costs, direct and indirect expenses, and capital expenditures. The team assesses each department's needs, evaluates cost-saving opportunities, and considers investments required for long-term growth, such as technology upgrades or market expansion efforts.  

This step ensures that the budget is comprehensive, covering all aspects of the business operations, and is aligned with achieving the strategic goals set in the first step.
 

Budget Preparation

After forecasting revenues and estimating expenses, the finance team synthesizes this information into a budget. This involves allocating resources across various departments and projects, prioritizing spending based on strategic importance and expected return on investment and setting spending limits to ensure financial discipline.  

The budget acts as a roadmap for the organisation, guiding spending decisions and resource allocation throughout the budgeting period. The budget needs to be flexible yet structured, allowing for adjustments while keeping the overall strategic objectives in focus.
 

Budget Monitoring and Control

The final step in the budgeting process is ongoing monitoring and control. As the fiscal year progresses, the finance team regularly reviews actual spending against the budget, identifying variances and analyzing their causes.  

This continuous oversight allows the organisation to respond swiftly to unforeseen challenges, such as economic downturns or sudden market changes, by adjusting spending and reallocating resources as necessary.  

Regular budget reviews also foster accountability among department heads, ensuring that spending stays aligned with the company’s strategic goals and financial targets. This dynamic approach to budget management ensures that the organization remains on track to achieve its objectives, despite any internal or external changes that may arise.

Now that we have a clear understanding of corporate planning and budgeting processes let's examine where finance teams use spreadsheets and how effective they are for this.
 

Drawbacks of using spreadsheets for planning and budgeting

It is more important to know your weaknesses than your strengths. 
-Ray Lee Hunt 

Establish Goals and Objectives

While few businesses use spreadsheets to document their goals and objectives, most use them to visualise them as dashboards. Spreadsheets offer a variety of chart types, including bar charts, line graphs, pie charts, and scatter plots, to visualise data trends and patterns related to strategic goals and objectives.

Also, spreadsheets can be created by consolidating information from multiple tabs or worksheets into a single view. Dashboard elements like slicers, pivot tables, and dropdown lists provide interactivity and flexibility in analysing and exploring data visually.

Also, to establish the goals and objectives, finance teams scrutinise multiple spreadsheets containing past data on revenue drivers, cost centres, market trends, demand drivers, etc.

Drawbacks: Finance teams must also note the drawbacks of spreadsheets. Spreadsheets do not support advanced chart types or customisation options, and complex data visualisations like network diagrams or geographic maps will be challenging to create or interpret using spreadsheets.

Using spreadsheets to analyse past data and other factors/drivers to establish goals is very cumbersome and manual. Finance teams spend too much time verifying if the data is correct, whether they are working on the right spreadsheet, etc. This time could be used for more value-added tasks if not for the multiple spreadsheets.
 

Gather Data and Information

Many finance teams traditionally use spreadsheets to aggregate and consolidate data across the organisation. Spreadsheets are used to aggregate data from various sources, including financial statements, sales reports, operational data, and market research. Also, the data from different departments or business units is merged into a single spreadsheet for comprehensive analysis.

This data is then formatted in spreadsheets to ensure consistency and compatibility. This includes aligning data types, standardising naming conventions, and applying consistent formatting rules. Finally, finance professionals often clean and transform raw data within spreadsheets to remove duplicates and correct errors for accurate analysis.

Drawbacks: The drawback of using spreadsheets for this is handling large volumes of data efficiently. As the amount of data increases, performance issues such as slow calculation speeds, file size restrictions, and increased risk of errors become more prevalent.

Not to forget, where there is data and spreadsheets, there is the good old ‘version control’ challenge as well. Especially when multiple users are involved in data compilation, it's challenging to track changes, revisions, and updates made by different users, leading to inconsistencies and potential errors in the data.

Adding to this is the problem of collaboration itself. It is challenging to share the spreadsheets with different teams, track their changes, and reshare modified sheets, the latest data, etc., in a flurry of emails. 

The other common issue is that spreadsheets are prone to data entry errors, formula mistakes, and accidental deletions, jeopardising the integrity of the compiled data.

A spreadsheet copy-and-paste error cost JP Morgan an incredible $6 billion in trading losses - Livemint

This makes it impossible for the finance leader to maintain data integrity and governance due to the difficulty of tracking changes.


Revenue Forecasting

Most small and medium businesses use spreadsheets to create complex financial models incorporating historical data, market trends, and various assumptions to forecast future revenues.  

Finance teams typically leverage spreadsheet functionalities such as data analysis tools, mathematical functions, scenario modelling capabilities, sensitivity analysis, scenario planning, and what-if analysis to project revenues under different scenarios and assess the impact of different variables on revenue forecasts.

The finance teams also have to conduct in-depth, granular, detailed analyses of various drivers and factors that affect the company's future revenues.

Drawbacks: While spreadsheets allow for driver-based planning and scenario modelling, conducting comprehensive scenario analysis with multiple variables and assumptions can be cumbersome and time-consuming, limiting the accuracy of revenue forecasts.  

Also, spreadsheets do not provide the depth of analysis required for such complex forecasting. For example, if finance teams want to understand the effect of multiple key drivers like pricing, marketing expenditures, hiring, and promotions on revenues in quarterly/monthly time periods, it might not be easy to get that level of in-depth analysis from spreadsheets.


Expense Estimation

Spreadsheets are commonly used to compile historical expense data, analyse trends, and project future expenses based on various factors such as revenue forecasts, inflation rates, industry benchmarks, and planned initiatives.  

Finance teams typically create expense estimation models in spreadsheets, using formulas, functions, and historical data to forecast future expenses accurately. The teams then allocate these expenses using spreadsheets. They must allocate these expense projections in granular detail, such as by expense category, department, project, product, or cost centre, for effective allocation and analysis.

Drawbacks: The drawbacks of using spreadsheets for expense estimation are similar to revenue forecasting. Spreadsheets cannot handle the complexity of the estimation models with increased variables and data volume. Also, access to real-time data for factors such as inflation rates, industry benchmarks, etc., will not be possible in spreadsheets, resulting in scope for inefficiency.

In addition, manual allocation to various departments and manual categorising expenses based on department, project or cost centres cannot allow for detailed and granular analysis, leading to inaccuracies in expense estimates.


Budget Preparation and Monitoring

Spreadsheets allow finance teams to allocate funds to different departments, projects, or activities based on financial forecasts and business priorities. Within the spreadsheet, each expense category can be assigned a budgeted amount.  

They also enable finance teams to track actual expenses against budgeted amounts throughout the budgeting period. Finance teams can input actual expenditure data and compare it to the budgeted figures to monitor spending and identify variances.

Finance teams also use spreadsheets to perform what-if analysis by adjusting budget allocations and assessing the potential impact on overall financial performance. They can explore different scenarios and make informed decisions based on the results.

Drawbacks: One of the drawbacks of using spreadsheets for budget preparation and monitoring is the time consumption. Updating and revising budget spreadsheets can be time-consuming, especially when dealing with large datasets or making frequent changes. 

This manual process can delay budgeting cycles and hinder decision-making agility. Once again, due to the lack of automation, manual inputs can result in incorrect data, calculation errors, etc., which pose serious problems during audits.
 

Challenges With relying on spreadsheets for budgeting solved by JustPerform
Spreadsheet challenges at each step of the planning and budgeting process

 

For these reasons, even small and mid-size organisations must think beyond spreadsheets to fulfil their planning and budgeting needs and achieve business agility.  

We all agree that planning and budgeting are vital to every organisation’s day-to-day functioning and long-term success. In that case, why should finance teams struggle with spreadsheets to conduct such an important business function?  

Are you okay to go to F1 races with a bullock cart while the competition is driving a Ferrari?

It's time to upgrade to Ferrari, i.e. cloud-based planning and budgeting solutions to win the race and stay ahead of the competition. Book your test drive now!
 

In today's fast-paced and uncertain business climate, relying on traditional spreadsheets for financial planning and budgeting simply doesn't cut it. Enterprises across all sizes are turning to cloud-based Financial Planning & Analysis (FP&A) to stay competitive. 

This modern approach not only accommodates the rapidly changing market conditions but also aligns with strategic business goals through a detailed process involving goal establishment, comprehensive data collection, revenue forecasting, expense estimation, and meticulous budget preparation. This transformation ensures that businesses are not only planning for success but are equipped to achieve it, leveraging technology to ensure agility and strategic focus in their financial operations.

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