Being part of No. of Budgeting projects in South East Asia, one of the common business requirements of Group finance/CFO is simulation of Annual Budgets
Typically the Annual Budgeting process is done based on certain Key assumptions like Forex Rates, Inflation, Prices, Borrowing or Interest Rates. The detail operational budgets like Sales, CAPEX, Cost & Operating expenses are planned based on this assumption which integrates to Financial Plan.
Let us look at following scenarios:
- A Oil & Gas entity makes an assumption for budgeting around the Crude Prices and Interest Rates
- A manufacturing industry makes an assumption of its Key Raw material price or Usage
- A CPG industry makes an assumption of its SKU price
Now given the dynamics of economy and market conditions the CFO or group finance wants to do real time simulation around the budget based on the fluctuations in the Key parameters and analyze the impact of these changes on the budget financials within the matter of minutes
Following are the challenge(s) with this approach:
- The changes in Key parameters has impact on the operational Budget which in turn affects the financials, most of the time our Group Finance/CFO do not really own this part of the Budgeting process hence face a challenge of linking the Key Parameter change to Operational budgets – which is mostly done outside any system
Given this challenge there could be following approaches:
- Automate the derivation of operational budgets based on the Key Parameters identified. The down side of this is the derivation of operational budget will be too complex from the key assumptions
- Have a separate model for simulation of the Budget which is an approximation of Actual Budget to give group finance a ball park analysis of the impact on the financials. This is how closely we can get to the Budget simulation process
Let this blog be the starting point of sharing your experiences around the Simulation of Planning (Budgeting/Forecasting) process.