The slides were commissioned in 2016 for an in-house development program at a large Australian public company. They have been slightly edited. In 2019, they still seem quite relevant. Budgeting and forecasting: The differences. Why has budgeting and forecasting failed? What are the traditional responses? Contemporary responses. What can we learn from the agility of the great tech disruptors? What is the influence of agile development and machine learning? What does the the future finance team look like?

1. Trends in Budget &
Forecasts
Presentation to the ABC Group Finance
Team

2. Introduction
This slide deck is adapted from in-house
training commissioned by CPA Australia
in 2016.

3. Key Topics
● Budgeting vs Forecasting
● Traditional responses to the problem of
budgets and forecasting
● Advanced, contemporary responses
● Learnings from the disruptive tech firms

4. Objective
• There are a large variety of responses to the
problems of traditional budgeting and
forecasting.
• What are the ”problems”, do they matter?
• This is a tour of the most important ones.

5. Key Trends
Business is definitely less static
Much more non-accounting information
Increasing IT, modelling and decision science
skills at all levels of management

6. Budgeting vs Forecasting:
what’s the difference?
Budgeting implies an internal focus, often on costs (e.g. departmental
budgets, which includes cost centres that don’t have an obvious source of
revenue).
“Forecast” is more likely to refer to shareholder communications, which
focus on revenues and earnings, gross margins and big picture expenses.
The difference is subtle

7. Budgeting vs Forecasting: what’s common
Both involve projections about the future
As a control tool, someone is held accountable to the projections
As a decision making tool, the projections may be scenarios affected by a
hypothetical decision (build a new factory)

8. The purpose of budgeting: why we do it
1. To communicate objectives and coordinate actions
2. To wisely allocate resources (which market to expand into? Which new
product to back?) [Decision support]
3. To see if we are on-track, and to guide actions when not on track [Diagnosis]
4. To reward good management [Performance]
5. To demonstrate to shareholders and lenders that we are in control and are
therefore safeguarding their assets. [Stewardship]

9. The tail which wags the dog?
The way we budget affects the way we report,
analyse, assess performance, diagnose and
respond.
So it is a very important process.

10. Finance: The meat in the sandwich
During a change, Finance will have a role in
helping the organisation respond by pushing
back on information requests, analysis and
reports which are not compatible with the new
way of working

11. Who “owns” budgeting?
The budget is mission-critical to finance in its role of control and
stewardship, and essential parts of the process are in the domain of
Finance.
But it is also a tool of senior management to deploy objectives, co-
ordinate behaviour and reward/correct performance
The more Finance pays attention to the bigger picture, the more
influence it will have over changes to the budget process.

12. Some strengths of traditional budgeting
• Consolidates easily and adapts to big &
small units, & different businesses
• Everything ends up as $: easy to measure
and compare
Benchmarking is easy, same reason.

13. Some strengths of traditional budgeting (2)
• The tools are easy, well supported in software, and
consistent across organisations (Piggy-backing on
what’s there)
• Low tech
• Business lingua franca: recruits hit the ground running
• The process and outcomes are well understood all over
the business.

14. The assumptions of the traditional process
1. Accounting numbers are good measurements
2. Historical performance is a strong guide to the future
3. The process is rational and transparent, with everyone
acting in the best interest of the entire organisation
(which is contrary to many other messages people get,
like bonus targets and performance reviews)

15. Are these valid assumptions?
1. “accounting reports are good ways to measure things”
They are easy to measure. They are quite objective and they are usually well
defined.
But they are not very predictive, and they are not very diagnostic.
They don’t provide much focus or reveal priorities.
They are divorced from the competitive differences which drive customer
behaviour, and they are not well linked to management decisions and plans.

16. Context
ABC News: The Business Feb 16, 2016
…Chief Executive Matt Bekier explains The Star's half year net profit results, which are down 38% on last year thanks to
some bad luck on the international VIP tables.
“There was an $80m difference between our normalised result [what was budgeted] and what actually
happened”.
Why: A huge deviation in the “win rate” for a key segment: international VIPs.
How was this forecast? The average of the last five years, which had previously proved to be accurate.
It turned out later in the interview that Star’s assumption about win-rate was well above industry
standards, and they knew this. They ignored it. They didn’t know why they were higher. They didn’t detect
the deviation as it was happening. Why? Probably because they weren’t looking for it. They were serenely
confident that the future would repeat the past and when challenged, Bekier noted that the trend win-rate
had now declined (of course, it now includes the recent experience).

17. Valid assumptions?
“Historical patterns of performance are a strong guide to the future”
This is true until it’s not. And it can be very, very “not”.
Worse, this approach can delay reaction and response to
changes.
Zero-based budgeting attacks this assumption in costs. An
old idea, related to this point.

18. Valid assumptions?
“The process is rational and transparent, with everyone acting in the best interest of the
entire organisation”
Bonus targets, personal ambition and genuinely competing ideas about who
should get funding mean the budget becomes a political process (which is not just
ok, it’s healthy. Politics is not the problem).
The budget process is naïve, and can get gamed (e.g. sandbagging). Also, it can
be abused as a top-down deployment of targets, while being presented as a
bottom-up collaborative process.

19. Question
What makes a fact useful?

20. Measurement should be useful, because then it is information.
Measurements should be diagnostic
not just that we missed a target, but why?
Measurements should be predicative (linked to models):
It should be linked to things the business wants to influence. So if we
want to increase margin by increasing the mix of more profitable products, then
we should be forecasting and measuring not GM%, but product mix, which tells us
how we achieve our targets, and if we miss, why.

21. Evaluating a budget process
Do you need to change?
This is the key question. We’ll come back to
that.

22. Improving budgets and forecasts

23. Change management tips
• Incremental improvements, technical changes bring
faster results
• Make sure you’re solving problems you actually have
• Make sure you target improvements worth doing
• There must be a business case (which is not easy, but
at least benefits must be defined in advance)

24. Look for a gentle, not steep, benefit curve
If you only implement it within 70% of perfect,
how close do you get to 70% of the benefit?

25. “Improve” from which perspective?
Budget improvement ideas nearly always aim
to make the budget more relevant to
management, not to “bean counters”.

26. Large scale cultural change Management Theory Finance Transformation IT Driven
New
Business
Models
Beyond Budgeting
Activity Based
Costing
1971
Lean
Manufacturing
1980s
Theory of
constraints
1980s
Business
Drivers
Data
warehouse
(1990s)
Big Data
Predictive
(2000)
Agile
(2010)
Balanced
Scorecard
Balanced Scorecard
(Consultant
Paradise version)
Taxonomy of approaches which change budgeting
Simplified
forecasting
Integrated
Reporting

27. Cultural Change (the more ambitious approach)
“The entire process of traditional budgeting is
linked to broken decision making, poor team-
work, bad incentives, harms innovation and even
that it is toxic to the culture of the business.” (An
excerpt from a Beyond Budgeting case study)

28. Note: How a consulting phenomenon happens
Starts with a powerful process insight, a really
good idea
People look to apply it more broadly
This can turn into broad approach which over-
reaches. But the original idea is still good.

29. Beyond Budgeting
Has become a Consulting Industry
Major process innovation: the Rolling Forecast
Has grown to encompass a huge scope

30. Beyond Budgeting: Its diagnosis
• “innovative management models represent the only sustainable
competitive advantage”
• Traditional budgeting is the tail wagging the dog: it dictates a
”command and control” model

31. Beyond Budgeting: Its diagnosis
• Budget cycles are insanely long, not very accurate and not focused
on what matters
• They are bottom up, yet get overridden by Board targets, and then
pushed down again, so the model also perpetuates a very centralised
model
• Organisations need to be more adaptive and more devolved: the
traditional budget prevents this
• More ”devolved” means a lot more autonomy to business units;
implies a bottom-up forecast process.

32. Beyond Budgeting: The cure
• Rolling Forecasts are the main innovation of Beyond Budgeting.
• This may be a quarterly update of the budget, for the next four
quarters, with a detailed month-by-month forecast for the next three
months.
• These forecasts are divisionally autonomous: instead of high level
targets from the board, the divisions challenge themselves to achieve
high performance, and the outcome is what it is
“Unlike a budget, a forecast is not a contract between the head office and
the division on a fixed target” (from a Beyond Budgeting case study)

33. Rolling Forecasts: My experience
• The rolling forecast still piggy backs on traditional P&L-based tools. It is still too
detailed, and not focused on business drivers. So not many wins.
• Management targets may not deal well with incentive schemes that change every
quarter.
• So one version of the Rolling Forecast becomes “blessed” with special significance,
because it is the set of targets that bonuses are based-upon. Thus, the ”budget”
comes back to life.
• So now, finance teams must report each month on actual vs the latest rolling forecast,
AND vs the “budget” rolling forecast. Lots more work.
• The project failed. Yet, rolling forecasts are a very valuable idea.

34. Beyond Budgeting: You didn’t pray hard
enough
Rolling Forecast proponents will say that bad experiences simply proves that deep
cultural change is needed to make Rolling Forecast work
These cultural changes emphasize autonomy, which most people agree is good for a
more flexible, responsive business.
Unfortunately, some businesses have shareholders.
Beyond Budgeting doesn’t offer much technically. It’s good insights are pretty obvious but
it doesn’t have much to say about making them work.

35. Beyond Budgeting: Read More…
I present Beyond Budgeting mostly as a cautionary tale.
Beyond Budgeting is a commercialised concept. An organisation called the “Beyond
Budgeting Round Table” provides consulting services, which are expensive. The website
is essentially a sales funnel.
Instead, try searching for Rolling Forecasts for a more pragmatic perspective.
There are some good ideas (Rolling forecasts), but not enough.
Suggestion: have a look at rolling forecasts if you’re not doing them, and consider cherry
picking this idea.

36. Balanced Score Cards

37. Balanced Scorecard: Major innovations
• Make leading indicators first-class citizens
• Big focus on innovation process and
customers
• Big focus on the one-page dashboard
(maybe the inventor)

38. Targets and reporting should be in 4
groups, only one of which is traditional
accounting.
The other groups are
• Innovation (often called Learning
and Growth)
• Customer
• Internal process efficiency

39. Each group has only max 4 measurements
Four is a “golden number”: it is hard to choose
only 4 KPIs for each of these important sectors
So you are forced to prioritise, which is
extremely valuable

40. Financial Market Value
Revenue per Seat
Lease, avg finance rate
Free Cashflow
Customer FAA On Time Arrival Score
Customer Net Promoter Score
Customer Repeat Rate
Process Time on Ground per turnaround
On Time Departure
Learning,
Innovation,Alignment Ground crew, % Spanish/English bilingual
% seats Inflight Sytem 21 deployed
Ground crew, % stockholders

41. Each target gets a traffic light score
Red: Below acceptable
Orange: Acceptable (e.g. +/- 5%)
Green: Good

42. What have we won?
• Leading indicators
• Focus
• Simplicity
Plus: It scales down to small teams (if you
include ”internal customers”)

43. Actual real world effects of balanced
scorecards
Extremely effective way of communicating what
priorities are, which is a really important part of
leadership
People notice most of all what gets measured

44. Implementation
Can do a very simple intranet/spreadsheet
template
Or can use a BI dashboard tool …
dashboards make 100 KPIs and gee-whiz widgets too easy, so watch out
BI can easily corral you into working with the data already there. The best KPIs
may force you measure new things.

45. Balanced Scorecards: Tips
• Don’t go over 16 KPIs in total
• Don’t design for consolidation: let divisions and
teams choose KPIs which make sense for them

46. Balanced Scorecards: Tips
• Make sure “learning and growth” focuses on
innovations, not only staff capabilities
• This is the #1 opportunity missed by Balanced
Scorecards. It’s hard to measure innovation
(e.g. product pipeline) but it’s very important.

47. Tips (2): Good KPIs to measure…
KPIs should be influenced by the team (measuring
Performance)
KPIs should be Key
Be biased towards KPIs which can be measured
monthly. Infrequent KPIs are perhaps too strategic
and make the scorecard dull

48. What about the “big” consultant-heavy
version?
It’s possible to find balanced scorecard
spreadsheet templates with 15 tabs. They map
each part of the strategic plan into indicators,
link action items and teams and so on.
At this point, it becomes cumbersome, tedious
and, frankly, “busy work”.

49. But is the Balance Scorecard a fix?
The Balanced Scorecard fixes some big problems with
traditional budgeting.
• Brings focus, leading indicators and business drivers.
• Very good communication tool
• But it is not good at predicting cashflow, short term
decision support or diagnosing short term deviations.

50. Conclusion
The Balanced Scorecard is a great complement
to any budgeting/forecasting process
Read more: The Balanced Scorecard, Kaplan,
1996
I recommend going back to the original ideas

51. Don’t buy into the Management Consultant
stuff
Treat the Balanced Scorecard as a simple idea.

52. Finance Transformation Projects

53. “Moving up the food chain”
Finance Transformation:
CFO-lead projects to to make finance more
influential in the business.
How does this touch budgeting and forecasting?

54. 57
STRATEGY
Points of difference
Competitive Advantage
Barriers to entry
Plan,
Objectives
Operations
Business Control
Are we on track?
Corrective action.
Are there surprises and
opportunities?
Traditional forecast
Budget/forecasting
after finance
transformation

55. This changes what the finance team does
• More scenario focused
• More focused on the drivers and objectives of the
business
• More diagnostic
• Owner of an analytical infrastructure as opposed to
owning reports

56. This changes the value of the time spent on the
budget
Finance transformation projects tend not to use
more headcount, they redeploy it
Fast closing, simplified budgets and leaner
reporting are key ways of freeing up finance
capacity

57. Please note …
Management has a growing expectation of either more
value from finance, or higher productivity.
Do More with same head count. Or do the same with less.
Automation and outsourcing of routine processes will
accelerate.

58. But how?
Since Finance Transformation is not specifically
focused on new budget approaches, it does not
have a dogmatic theory about what to do.
It is an outcome. Which leaves room to take
charge.

59. Next: technical approaches
That concludes an overview of cultural/big
picture ideas that affect budget and forecasting.

60. Technical approaches
Technical approaches to change
budget/forecasting are ideas focused specifically
on the budget/forecast/reporting process.

61. How is technology impacting budgeting?
1. Massive amounts of data are now “surfaced”
via integrated IT and big data tools.
2. Expectation of faster, more interactive, more
available everything
3. The technology industry is itself innovating in
major areas of “management theory”.

62. How is technology impacting budgeting?
• Big Data: Businesses can now process massive amounts
of data (example real-time register sales, geolocation data)
• Management is getting more sophisticated in the use of
analytical IT: being an Excel expert is increasing less
relevant. Who knows MDX and R?
• Predictive analytics: patterns of correlation and leading
indicators can be found.

63. Big Data: So what?
There is now massively better information available to
model business performance, to measure it and to
diagnose.
This will remove the management relevance of the
traditional budget and forecast process. It’s like taking a
kite to an airshow.

64. Example: The long tail …

65. Technology impacts, part 2
The world’s fastest growing and most profitable businesses face
• extremely fast-moving competitors
• unprecedented levels of disruption
• Very rapid growth
From innovation to product development to strategy, these businesses have evolved new
ways of making decisions which *could* have lessons for older businesses. We come
back to this.

66. An early technical response:
Activity Based Costing

67. Activity Based Costing: an early response
Activity Based Costing tried to link real-world
processes to cost consequences. It highlighted
the relevant and sunk costs and should have
been great.
But it’s too dogmatic, and too tied to cost
accounting.

68. Activity Based Costing: Conclusion
ABC Now
Activities should drive numbers (costs) Model the revenue, margin and some costs on
activities [ABC Validated]
Separation between direct costs and indirect
costs is important
Decision support needs relevant costs, which
change depending on the decision [ABC
Validated]
The traditional P&L-based framework can be
adapted to meet decision making and
diagnostics
No, this is the wrong tool and makes it too hard
We need to get every detail locked in the ABC
costs
Be pragmatic. Simplicity and speed is a critical
success factor, completeness is not

69. Zero-Based Budgeting
This is slightly re-emerging as a idea.
Zero based budgeting means every budget cycle starts as
the business had no history. Every line needs to be justified
on what we know now and what we expect, not the past.
Experience of it is not good, and our knowledge of the past
is an asset, as long as we know its potential to mislead.

70. Driver-based forecasting

71. 74
STRATEGY
Points of difference
Competitive Advantage
Barriers to entry
Plan,
Objectives
Operations
Business Control
Are we on track?
Corrective action.
Are there surprises and
opportunities?
Traditional forecast
Budget/forecasting
after finance
transformation

72. This is a toolkit, not a Theory of Everything
Business Drivers
(including sustainability
drivers, TBL drivers)
Business Model
Main Line
Projection
Business Model
Business Model
Scenarios
Strategy, competitive advantages
Targets, performance measurement Decision support
Actuals

73. Good business drivers are crucial for this
toolkit

74. What makes a business driver?
• Must be influencable
• Must be significant
• Must have a mathematical chain to a cash flow
event:
• if it changes by 10%, you know what that means for cash in
and cash out

75. The Business Model
The way in which the business drivers affect
cash-flows is the business model
The budget is a fairly generic tool
The business drivers & model is very specific to
a particular business

76. The model should be a simple as possible,
even embarrassingly simple
Theoretical win = Average bet x hours
played x decisions per hour x house
advantage
Where are the business drivers?

77. This is a conversion model …. Too
complex though.
This was simplifed into...

78. Simplified sales model
# Enquiries
Repeat Rate
Recovery
Rate
%
Consultation
% First
Procedure
$ Avg Spend
Forecast
Sales
# Active
patients
# newly lapsed
patients
Yellow =
forecast input
Model
assumption
(held
constant)
Forecast
outcome
.
.
.
.
.
.
Forecast
Sales
Forecast
Sales
x
x
x
=

79. Keep it Simple
• By discovering and ranking business drivers,
predictive analytics can help simple models
work better.
• But the value of simplicity is not washed
away by neural nets and super-computers.
82

80. But when triggered, revert to a more traditional
process
The simplified approach offers focus, which is
very powerful.
But if things change, it is necessary to revert
back to a detailed process (and saying this
helps change management)

81. Examples of simplicity visualised
84
A sales model based on non-
accounting leading-indicator drivers can
provide continually refreshed forecasts.
Simple forecasts and open-source
technology make this cheap and easy.

82. Forward drivers can be shown easily
85

83. Diagnosis
86

84. Communication and analysis
87
Measures which everyone understands. They get how to influence them. They are bonused on them.
Result: very strong alignment and engagement and everyone is on the same page.

85. See Also: Integrated Reporting
This approach has some momentum with a UK-based non
profit group http://integratedreporting.org/
Big-6, major investor groups, some NGOs. Good
resources.
It integrates sustainability drivers more than I have
mentioned, and has a good focus on investor relations

86. Steps for implementation
The hardest part is selecting the right drivers
and model.
The technology required is not sophisticated.
Change management: there is a lot less detail.

87. Big Data

88. The impact of big data & analytics
The industry expects these key impacts:
• Finance skills sets will change
+ Search US job ads for “data scientist” (data analyst V2)
+ PwC said accountants at the most at-risk job for being automated out of
a job (97.5%). Ahead of checkout staff! Another study said 94%, 2nd place.
• Data becomes an asset which needs to be monetised and secured
• Decision making and planning

89. +

90. What is “big data”
”Big” means “lots”. Business has always had incredible
amounts of data but most of it has been inaccessible.
Even Xero has “big data” on its roadmap. And it’s a small
business accounting tool.
Better: “big data” is non-traditional data from transaction
level, or real time
“Data mining” is an older term

91. Some examples
Scanner-based postponed rebates
Fraud-detection
Social-media trends
Correlations: Beer and nappies

92. Previously Inaccessible Data
Inaccessible means it couldn’t be collected
effectively, shared effectively, wasn’t
standardised and couldn’t be linked to other
data.

93. Big data and budget/forecasting
Finance is still in a learning phase.
There is hype, and hype can mean that people rush to
spend money of tools without understanding how it actually
helps.
Tools can mean you drown in analytics which are more
noise then signal.
Demand focus and simplicity as an outcome.

94. Stripping away the hype
The best new tools of this era are:
• Data visualisation
• Interactive what-if

95. New Business Models
(What can we learn)

96. Why care?
After around 20 years, a consensus approach
has emerged to suit extremely disruptive
markets with breathtaking speed to market
Google, Facebook, Uber, Airbnb, Xero,
Airtasker, ....

97. First point: Extremely analytical businesses
These new businesses are extremely data
driven.
If you see Finance as a powerhouse of
modelling and analysis, there is a lot to like.

98. Going to market: What was broken
The traditional product development approach in software
has been the "waterfall" approach.
Define what you want (top of the waterfall) and proceed
one-way through distinct phases until the product is ready.
The ”waterfall” model is a traditional project flow, not just in
software. It is basically Design -> Build -> Deploy -> Done

99. Does not deal with complexity or change.
The waterfall model is ponderous. It invests
heavily in design before users get much chance
to test it. Therefore, bad decisions or changes
in the real world are big problems.

100. Doesn’t deal with the interaction between
technology and opportunity
We have learnt that people often don’t see the
possibility of a new idea until they get their
hands on it.

101. Response: Agile Methodology
Agile approaches are a derivative of ideas going back to
the 1990s (such as prototyping)
Really grabbed attention in the past 10 years
Adoption of ideas by 'Fortune 500': some experimentation
in 2000s, momentum growing since 2010 (in the USA)

102. What is it?
• Fast development, rapid releases, beta channels
• Design is not very detailed, and is defined by what the end user will
do
• The team constantly goes back to the market to observe customer
and competitor behaviour. Much more user involvement
• It is very focused on meeting deadlines, less focused on what gets
delivered. Never finished. Fan of kanban, a lean-supply-chain idea.
Project management is surprisingly low-tech.

103. Reasons for use in large organisations
(general project management)

104. What does it mean for Finance if an
organisation adopts Agile for projects?
• More projects, budgets and business cases with a shorter time
frame.
• Metrics which are customer-focused, not traditional.
• More complex mix of personnel costs
These are all very manageable.
Finance has an opportunity to help agile project teams take longer term
views of their project, and to help model market behaviour.

105. Agile mostly has insights for response speed and continual
alignment to customers & competitors
…importance of moving away from the idea of change as a turning
battleship. Instead, … suggested adopting an agile series of transitions
that respond to the nuances of a constantly changing market
Sept 2015 Panel discussion of PwC Global PPM Survey

106. Opportunities for the budget process to use
Agile ?
Agile philosophy is definitely towards simpler management tools and more
automation
Agile breaks project into small chunks, each of which is validated before
proceeding.
The traditional budget process is iterative, like Agile, and it is often broken into
small pieces. But it is slow and dominated by the process.
There is a good chance that some aspects of the Agile methodology could
benefit a traditional budget process since they are not actually chalk and
cheese.

107. Session Conclusion
Traditional budgeting: strengths and weaknesses
Are these weaknesses relevant? Why?
Do they require tweaks of a technical or process
nature?
Or do they require cultural overview?

108. Budget/forecast maturity model

109. Integrated forecast maturity model
Level 1:
Streamline the traditional forecast method. Use
drivers or KPIs synthesised from accounting
data such as price & mix effect, ratios like
debtors days outstanding.
112

110. Integrated forecast maturity model
Level 2
Use non-accounting business drivers for sales funnel
and/or key costs, feed this into traditional forecasting.
Measure actual drivers and diagnose, several times per
year but outside of the normal reporting and analysis
113

111. Integrated forecast maturity model
Level 3:
Business drivers are aligned to strategic plan and incentive
schemes. All business drivers meet the definition.
They are the central discussion in forecasting and
reviewing results. They are used for sensitivity analysis.
Dashboard tools provide daily or real-time insight into
business drivers and automatically updated forecasts.
114

112. Integrated forecast maturity model
Level 4.
Business drivers are partly based on predictive
analytics. Forecast models are revised to follow
changes in management focus or market
developments.
115

113. Conclusions …
For finance this is a time of great change. Many
organisations are looking to integrate non-
accounting numbers into forecasting and
performance management, to become more
agile and scenario based, and to demand
higher productivity from finance

114. Questions/Discussion