This post is the first in an on-going series dedicated to the Planning feature set ('PPS Plan') of Microsoft Office PerformancePoint Server 2007-- while this one sets the stage, future posts will provide a closer look at specific tools and components.
Note: Apologies in advance to all the CPAs, CMAs, CFOs and other accounting & finance professionals reading this... the next two subsections are geared specifically towards the BI practitioner who may not be familiar with the business case for PPS Plan, and, who may also be looking for a little more versatility.
1.1 Budgeting 101
The greatest difficulty some BI practitioners may have with PPS Plan has much less to do with the tools available, and likely more to do with understanding its purpose. Fundamentally, PPS Plan provides a framework to develop the budgets for a given organization, for a given time period. Planning itself is an iterative exercise wherein budgets themselves are used to express an organisation's plans for the furure in monentary terms. An organization usually has short-, mid- and long-term plans.
Short Term - operational plans, typically up to 12 months, reflecting day-to-day business activities
Mid Term - normally between 1-5 years
Long Term - strategic plans covering 5-10 years
Any accountant or finance professional can tell you that the bugeting process (or 'budgeting') is an integral part to the planning process, and, planning itself is essential to the performance management cycle. Budgets normally take both internal and external forces into consideration, such as past performance, economic and market trends, as well as legislation. A budgeting cycle itself is a period of time in which budgeting activities (modeling various scenarios to identify the most realistic budget, assigning key individuals to performing budget data entry, as well as process management of approval workflows and subsequent budgetary reporting). Budgeting, therefore, aids in both operational control and strategic direction by setting realistic expectations, whilst planning ahead for the next business period (month, quater, fiscal year, etc.).
Budgets apply to a variety of business functions, and can be categorized as follows:
Revenue Budgets - for a given slice of time, these budgets are used for estimating income for the organization. Revenue budgets typically represent the first product of a new budgeting cycle, since businesses logically need to first estimate how much they plan to sell before estimating how much they need to produce (for example)
Operating Budgets - estimate activities that will affect profit outcomes, such as cost of goods sold, direct labour and production
Budgeted Financial Statements - show estimated results and projected financial position of an organization
Master Budgets - a combination of all the budgets in an organization, dealing with all phaes of the operations of a business, for a particular period of time; in some circles, this is called a rollup of budgets or a corporate budget rollup.
There are also a number of approaches to budgeting:
Static - prepared for a single level of business activity such as a service-level agreement (SLA)
Flexible - several budgets covering a range of activity such as sales targets of 100, 200 and 300 cars sold
Periodic - budgets are developed for a specific period of time, usually in-line with short-, mid- or long-term planning
Rolling - also referred to as continuous, these are periodically updated by adding a new time period to a given range (for example, an 18-month, or 6 quarter forecast) and dropping or ignoring the earliest period therby creating a "sliding window of time"
Zero-based - while budgeting normally adjusts historical numbers for forecasted events, this approach sets initial figures for an activity to zero-- this obligates business decision makers to actively review and justify the value of each activity before allocating resources
Activity-based - this approach involves forecasting workloads of business processes (activities) and expressing them in financial terms to improve performance and achieve specific goals; also refered to some as 'peformance-based budgeting', this approach allows for identification of value-adding activities as well as their impact on key drivers (KPIs)
In the real-world these approaches are often combined in ways most relevant to a given organization.
It should also be stated that while budgets typically involve forecasting business targets, the budget cycle of activities is meant to serve as a compliment to sound management practices, rather than provide a substitute. Now, with the background story behind us, let's move on to the main pain point organizations have in their budgeting cycles.
1.2 Problems with Budgeting
The process of budgeting can prove to be time consuming, particularly in larger organizations, and especially in the absence of any process management or automation. Productivity issues arise as assigned staff perform the following tasks:
- collecting and integrating data to support modeling
- creating flexible business models supporting different categories and approaches
- preparing calculations for specific business rules
- applying assumptions into business models and rules
- collaborating on assignment, work and approval of budgeting tasks
- mapping models for key budget areas into a larger master budget
- communicating outcomes from budgeting in the form of budgeted statements of fiancial position and performance
- aligning modified budgets and targets to performance objectives
As organizations adopt more sophisticated approaches to budgeting (such as zero-based or activity-based), challenges to productivity increase. Since one of the key themes of business intelligence (and by extension performance management) is to make better decisions faster, it becomes a strategic imperative to optimise the budgeting process.
1.3 Enter PerformancePoint Planning
The Planning feature set in PerformancePoint is essentially designed to address the productivity problems found in budgeting by:
1. Providing a secure, integrated server platform to plug into key data sources to support business modeling, and allowing for the creation of multiple modeling platforms to support key budget areas as well as master budgets (or rollups).
2. Delivering easy-to-use applications to design models to test a variety of scenarios. Input forms, business rule calculations and assumptions (all central to budgeting) can be crafted in a familiar Microsoft Office environment and can be assigned to specific contributors as part of a budgeting cycle.
3. Enabling business users to communicate and collaborate more efficiently throughout a budget cycle, from line-item level annotations to automated e-mail notifications.
In an upcoming post we will have a look at how specific PPS Plan applications work together, at a conceptual, in a typical budget cycle.
- Adrian Downes
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