In the blog series we discussed six best practices in our earlier blogs – Budgeting Best Practices with SAP Business Planning – Part I, Budgeting Best Practices with SAP Business Planning – Part II and Budgeting Best Practices with SAP Business Planning – Part III. Here we discuss the remaining best practices.
Budgeting Best Practice # 7: Driver based planning
The planning exercise is all about assumptions. As the exercise is futuristic, the models are created with assumptions that the top management or the LOB managers perceive to achieve the goals. Drivers are nothing but the pillars based on which assumptions are determined. So from a best practice standpoint, it is very important to build a template or planning model that sits on top of all the drivers. The LOB managers set the values for the business drivers in a budgeting process, based on which the complete budget is determined. The advantage of such an approach would be to make sure the budget is supported by the strong drivers that are essential for a particular business.
Examples for driver based planning are the following:
To determine the outbound freight cost, the driver based model would consider the drivers such as Sales volumes, fuel cost, maintenance cost per vehicle, efficiency of transporation volumes per vehicle. The cost would be built based on these drivers and as the driver values changes, the freight cost would change. So the advantage of this approach is not to recalculate the cost manually when there is an increase in fuel cost or change in the sales volumes forecasted.
Another driver based model would be to determine the workforce cost. The drivers for the workforce cost would be built based on the Headcount FTE (full time equivalent), Salary rates, merits and overall company revenue to determine some bonus element. Again through this approach, the model is developed comprehensively based on the way the company runs the business, and it is designed as a driver based planning model.
SAP Business Planning offers powerful driver based planning capabilities. The solution offers predefined driver based models for revenue, expense, headcount and capital expenditure planning. Also as the solution is business user owned and managed, it allows powerful, flexible and easy to use administration interface to build the driver based models.
Budgeting Best Practice #8: Budget Material content only
Maximum budgeting time should be spent on areas that would have significant impact from a revenue, cost or profits. It would not be prudent to invest time to detail out an expense line item that is just 0.001% of the revenue, except that it may be captured as a total figure. Budgeting time should be spent to model on very high impact items such as revenue, the main expense that contributes to say > 10% of the overall cost. This will also allow opportunities to build strategies to control cost or enhance revenue.
SAP Business Planning solutions offer the concept of line item detail functionality which allows for free form detailing of certain low value expenses, to ensure lot of time is not spent on modeling these expenses comprehensively in the planning models.
Budgeting Best Practice # 9: Timely and accurate
This is a no brainer. As in every process, budgeting exercise should be carried out in a specific timeframe to ensure it is relevant. It is not a good practice to start budgeting for the year after the year starts. Many companies ensure the budgeting for the next calendar year is completed in the November timeframe of the previous year. This allows for a well laid out business plan for the following year. Offcourse this budget needs to be revisited continuously and should allow for modifications.
The accuracy is another aspect. Especially for the higher impact elements, it is important that the numbers are accurate. When building a driver based model, the calculations that results from the drivers should be accurately modeled to get the right results. This is an important consideration where How are EPM solutions better than spreadsheets? could be a misery and SAP CPM solutions would help.
SAP Business Planning solution is the best suited tools to ensure timely and accurate budgeting are carried out. Since it is Empowering the business user to implement business change with CPM owned and managed, the model is built by the business users who know how the calculations should work or how the data should be used. Also through the Business Process Flow tracking capabilities, the budget coordinators can ensure that the budgets are prepared in time.
I hope you benefited by reading the above budgeting best practices. It is time now to go implement these best practices at your end in what ever form using SAP Business Planning offerings. SAP is greatly focusing on this area with multiple SAP gets serious about EPM to enable best practices in budgeting and reporting.