The latest economic downturn exposed many organization’s weaknesses in their annual planning processes. Companies have long grumbled about the time and resources needed to create an annual plan but have had to put up with the process as a necessary evil as they search for a replacement method.

In general, the four main objectives of the annual planning process are:

• Set financial targets and metrics for the upcoming year
• Communicate those targets and metrics to the organization
• Determine bonus compensation for the organization (usually the management team)
• Provide insight into future performance (analyze market opportunities and threats)

Most organizations do a fine job setting and communicating financial targets as well as determining bonus compensation.  Where they falter is in providing insight into future performance.  They tend to rely on historical data for future prediction, which is not a good predictor in today’s economic environment.  In fact, if the current trend of market volatility continues, yesterday’s data will be even less valuable in the future.

To better predict future performance, forecasting models that observe BOTH internal and external market drivers are needed to create these financial forecasts.  Developing financial models is hard work and determining the linkages that drive value for an organization takes time.  However, the benefits provide organizations with a competitive advantage to exploit opportunities before their competitors or simply avoid a train wreck.

An alternative to the Annual Planning Process

The annual planning process often takes more than 3 months to complete, which often makes the annual plan financials obsolete before the plan is even completed.

To avoid this, some organizations are turning to a rolling forecast to “wean” themselves off of the annual planning process.  A rolling forecast is typically a financial plan that encompasses more than one year (18 or 24 months) and is completed on a monthly or quarterly basis, derived from financial models.  The use of modeling has evolved as a result of financial organizations not having the time or resources available to create comprehensive financial forecasts within the normal annual planning process.  Due to these time and resource constraints, the development of a more efficient financial project process using financial modes instead of user input was formed.  This forecasting solution could also be used to develop financial projections based on a set of assumptions or scenarios such; as “Make versus Buy”, the start of a new product line, the entry of a competitor, and commodity price increases, etc.

Most organizations still utilize an annual planning process but may want to look at this alternate option.