Budgeting Best Practices
We discuss few best practices here in addition to what we discussed in Budgeting Best Practices with SAP Business Planning – Part I of this blog.
Budgeting Best Practices # 3: Both Bottom up and Top down
Many organizations do one of the two approaches. Some organizations plan completely top down, where the top management provides all the goals and targets of what needs to be achieved. The outcome of that is a detailed budget just driven by those top goals. But this could be very unrealistic, since the business unit managers may not be able to commit to this.
Few other organizations do the pure bottoms up approach where the whole organization does a detailed budget, flowing through the bottom up chain of command, and this again may not achieve the management goals satisfactorily.
So the best practice approach would be to have budgeting done with both scenarios and finally the bottom up plan goes and meets the top down (target) plan, marrying them together. Now this could lead to lot of disagreement within the organization due to constraints on time and effort for doing both approach. This is where SAP Business Planning can enable and fasten the whole process of multi scenario budgeting . With capabilities to reconcile two different categories of budget, organization can concentrate more on the planning and strategic aspects, rather than on the manual reconciliation and co-ordination. Since the whole solutions are empowered for the Empowering the business user to implement business change with CPM, it provides lot of flexibility to model different planning model, easily and flexibly.
Budgeting Best Practices # 4: Relative vs. time trend budgets
This is a very important best practice in the current competitive and environment. Lot of effort is spent in creating budgets that are what I call ‘time trend’ budgets. These are just numbers fixed in the budget based on a certain %age growth over the previous year. But by doing this the opportunities that exists beyond the current framework of the business are not leveraged.
The best practice approach would be to start the entire process from a relative perspective, with respect to the industry and market benchmarks. If it is revenue planning, there should be comparisons of what the market size is and the growth opportunities for the market. In the bottoms up plan approach each regional sales manager can contribute to how much of the market share his/her region can derive and what are the new opportunities that exists that the competitors have explored or yet to explore. In the top down plan, the top management may identify the strategies to grow the business. If it is supply chain planning, the companies may benchmark against industry metrics to achieve the best results. The plan should not be just to beat the last year internal metrics but to look at the industry benchmarks metrics,in order to drive the company to excellence. This best practice promotes business or entrepreneurial thinking to every manager, rather than doing the budgeting as a financial centric activity that is usually completed as a transactional task.
The vision of SAP gets serious about EPM is to promote the business manager from a mere Leveraging Variance Analysis in CPM. Also the predictive analytics capabilities in SAP CPM offer analysis of data based on their relationships. Predictive analytics can be leveraged to plan for sales volumes based on GDP/ income levels/ purchasing power of the market segment or another example would be ascertain the maintenance cost based on the available oil prices.
We would continue to discuss other best practices in our upcoming blogs.