To companies trying to compete and thrive in 2017 and beyond, it’s becoming increasingly apparent that the traditional budgeting process is providing less and less value. It’s taking sophisticated on-the-fly modeling (OTF) to better understand how your organization may look over the next month, quarter, and year.
The world is changing too quickly for companies to enjoy the luxury of not investing in the most cutting-edge technology, processes, people, and tools to incorporate the best real-time data available (often, actuals). Based on that data, financial models and forecasts are being modified, adjusted, and improved.
Modeling is never 100% accurate, as it is simply a prediction of the future at a given point in time. To create a traditional budget and never update it throughout the year would be like a sailor picking a fixed point on the horizon to head toward, and never scanning the surroundings until the boat reached that point. No sailor would ever do that. One of the first lessons of sailing is to constantly monitor your environment and be prepared to make the appropriate maneuvers as the situation dictates.
A Cultural Change
OTF is a cultural change from traditional budgeting. It’s driven by challenging the status quo and discarding ineffective budgeting procedures. OTF combines a constant view of the future with a powerful view of the past and present, giving the organization a better understanding of the drivers of the business.
OTF starts by asking business questions first, and then updating the numerical impact of those answers in the model. We must be constantly asking ourselves what information has come to light that changes our view of the future. We must also review how we need to change our behavior, and what actions we need to initiate, right now, to accommodate and influence the future.
The OTF process begins with asking the organization these five basic questions:
1. Who in the business is best suited to predict and influence the future?
2. How often is the landscape ahead of your business changing?
3. Is there a better way to measure the past?
4. Is there a better way to capture the present?
5. Is there a better way to predict the future?
Business conditions are constantly changing, and we can constantly be learning new and valuable information to help us make better, smarter decisions faster. With OTF, organizations are able to have the best picture of the company’s performance by incorporating the past, present, and future. It’s not just a modeling tool; if properly adopted, it can have a profound impact on the culture and effectiveness of the organization.
Like all things new, there is going to be pushback. When you introduce OTF into your organization, have plenty of copies of “Who Moved My Cheese?” available to share.
A few of the comments I’ve heard over the years when introducing OTF include:
1. What if the model is wrong?
2. Is this just about moving the goalposts?
3. I don’t have the time and/or resources to implement OTF.
A Better Way to Predict Performance
All models are going to be wrong to varying degrees because nobody has a crystal ball with a perfect view of the future. However, OTF has never been about being right or wrong. It’s about the model being as accurate as possible given all the information you have at your disposal, and then assessing what your risk is if reality is different from the model.
Is OTF just a way to move the goalposts when some part of the business plan is failing? No. There’s a significant difference between modeling your perception of the road ahead for the business and changing the targets you want to achieve. OTF doesn’t change the targets. It simply adjusts the way forward, possibly resulting in a change in the expected outcome as more information becomes available.
Does OTF just create more work for my FP&A team? No. The reality is that once the process is set up, OTF will be less work, not more. In fact, it will share the workload of predicting and influencing across the entire organization, not just the finance team. It will free up your FP&A professionals to focus on more high-value, high-return activities.
Brian is Founder and Principal at Kalish Consulting. He is Former Executive Director – Global FP&A Practice at AFP. He has over 20 years of experience in Finance, FP&A, Treasury and Investor Relations. He previously held a number of treasury and finance positions with the FHLB, Washington Mutual/JP Morgan, NRUCFC, Fifth Third and Fannie Mae. He has spoken all over the world to audiences both large and small hosting FP&A Roundtable meetings in North America, Europe, Asia and soon South America. Brian attended Georgia Tech, in Atlanta, GA for his undergraduate studies in Business and the Pamplin College of Business at Virginia Tech for his graduate work. In 2014, Brian was awarded the Global Certified Corporate FP&A Professional designation.