Smaller businesses (like our clients, known as SMBs or Small to Midsize Businesses) have some of the same forecasting and budgeting issues as their much larger brethren. Someone, in some governmental agency, somewhere along the way, long ago defined a “Small to Medium Size Business” as one that does less than $500 million in sales per year. That’s still a mighty big number. Our clients are typically in the $10 to $100 Million range, but even so, many of the same principles, needs and competitive pressures that make forecasting important to larger firms, still apply to smaller ones.
Financial execs need to prioritize their spending be it for R&D, sales development, growth and expansion, or a host of other valid reasons. Increasingly these days, they’re leveraging the reporting capabilities of their ERP systems to enable visibility into current cash positions and needs.
Early this year, Aberdeen Research interviewed over 100 SMBs to uncover a few of the strategies they use to improve their budgeting, planning and forecasting. We’ll recap a few key points in this, and our next, post.
First, for context, we would note that “market volatility” appears to be the key driver here, voiced by nearly half the 118 survey respondents. It creates a need in companies to dynamically account for change. And thus, it drives the need for good, accurate financial data – and quickly. The need to “better align planning and budgeting with corporate goals” and the simple fact of “growing operational costs” were also cited by respondents as among their top pressures driving the desire to improve their financial planning.
When successful, about one third accomplished a speed-up of over 20% in “time-to-decision” during the past year. Even those who were not as successful in using ERP to improve their financial planning cited minor gains here. But more notably, those who could do really good forecasting and planning found themselves with actual budgets that came out below their forecasted ones (by about 3%). Only the best performing companies could say this. And virtually all surveyed firms noted improvements in profitability over the past one to two years.
The best companies engaged in two key strategic actions: they assessed risk and its impact on operations and financials on an ongoing basis, and they implemented risk-adjusted planning measures accordingly.
One key to these higher performing companies: They utilized a lot of “what if” scenarios and change analysis. They integrated risk into their planning models for budgeting and forecasting, including the “probability that certain events could happen and the impact of these events.”
In addition, the leading firms made sure they collaborated in their planning scenarios from the top down, the bottom up, and across departments. They were significantly more adept at collaboration so that, for example, sales was actually communicating with production in order to ensure that sales targets were attainable.
In our second of two posts on financial planning and forecasting, we’ll take a quick look at the necessary tools and strategies for making the most informed decisions. Stay tuned…