Armanino Blog
Article

Why Financial Planning Details Can Be Too Much of a Good Thing

by Mark C Wagner
March 09, 2017

Financial planning and analysis solutions have come a long way in recent years, moving design and administration away from IT and into the hands of the CFO organization. These next-generation tools can be very flexible and give users the ability to design models that are extremely detailed. The shift of control to Finance is obviously a good thing, however, having this much capability can also encourage users to go overboard with complexity.

The Armanino team has worked on over 500 FP&A projects implementing cloud solution, Adaptive Insights. What we often find is that when Finance teams start using Adaptive, their excitement over this newfound freedom translates into building way too much detail into their planning.

Granularity takes time and effort to build and maintain, and it doesn't always get you worthwhile results. Although you need enough to be in the ballpark budget-wise, you're still attempting to predict the future, which is inevitably filled with unexpected events. No matter how detailed you get, once you are into your budget year, there will always be things that change and throw off your original assumptions.

For example, one of the most popular Adaptive tools is the personnel modeling capabilities. These allow you to look at every cost associated with each employee, like start dates, department allocations, salaries, raises, benefits, etc. If you wanted to, you could actually build calculations in your budget that would equal those of the payroll department every month.

However, developing that model is going to take quite a bit of time to build, and potentially even more time to keep up and running. And while the plan could be exactly right to start, as soon as someone quits unexpectedly, there goes that perfect plan―your numbers are wrong for the rest of the year! So the goal is to find a balance between being in that ballpark and not killing yourself with the effort required to create and maintain too much detail. In most cases, a high-level approach may be all you really need.

How do you determine this? Ask yourself, when you are reviewing variances throughout the fiscal year, if it matters if medical expense was a little high, while 401k match was a little low. Are you drilling into these individual costs, or can you look at personnel expenses in total? If you have been planning pretty well in the personnel arena, maybe you just need a run-rate percent assumption between salaries and fringes, based off your actual results in the prior year. One assumption and one formula might get your plan just as close to actual results, for a fraction of the effort.

For other line items, in general, you may want to set a threshold for materiality―say, $1000―and then look for the main drivers for things that are above the threshold. Or, you could look for expenses to link to headcount and set an amount per person for those. For example, in planning copying expenses, you don't need to dive into an analysis of how much paper each team used for each project. Instead, you could use a set amount per headcount based on last year's costs per person.

Also keep in mind that no matter what path you choose, by not wasting your valuable time maintaining complexity, you'll be able to put your resources toward true value-added analysis. It won't matter much that your personnel is planned at the GL account level if your total company revenue is down 10% to last year, and you have no idea why.

Learn more about utilizing the right tools for your team's budgeting, forecasting and financial planning needs with Armanino.

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Authors
Mark Wagner, Consulting, Armanino
Senior Manager
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