As part of the forthcoming SAP Press title “SAP Enterprise Performance Management (EPM),” I will be publishing and curating articles that appear in third-party publications here in this blog. Today I look at the changing face of financial planning and whether planning and budgeting approaches used 50-100 years ago still hold water in the advent of modern 21st century processes and technologies.
Financial planning, in a nutshell, allows for the various assets of the organization to be allocated, used, processed, and transformed into the goods and services that the organization creates. In return for these assets, the company usually expects some form of consideration – usually in the form of revenues from the sales of goods and services – which offsets these cost inputs and (hopefully) drives a profit. Most not for profit organizations an institutions, such as higher education universities, operate very similarly. In these situations grants, tuition, endowments and other revenue inflows are offset by the costs of executing the operations of the institution mission (often described in a charter or articles of incorporation, similar to a commercial business). In the end financial planning shows the outflows and inflows of assets in exchange for goods and services.
Great debate has arisen in the 21st century over the mission of companies and the role of financial planning. First, let’s consider the mission of an organization entity. In the years of the industrial revolution and post-industrial era (roughly from the late 1800s to the late 1900s), businesses outside of charity organizations were structured for the purpose of creating goods and services for a profit. This profit (overall revenues less costs and adjusted for taxes, depreciation, and amortization) was generally returned in the way of dividends or profit shares to the stakeholders of the company. Most often these stakeholders were shareholders (for public corporations), partners (for limited liability partnerships or memberships), or investors (for private companies repaying loans and start-up costs). In the late 1900s and early 2000s these models have expanded to include very vibrant not for profit organizations (some like the American Red Cross and its international affiliates have multi-billion dollar operating budgets), private institutions (higher education and private research, lobbying or special interest organizations), as well as so-call benefit corporations (also known as B Corps) which balance shareholder return with social benefit concerns without being labelled as a non-profit organization. While the forms of companies have evolved and expanded, the need for financial planning remains a core foundation of every organization that does something for some group of citizens or consumers.
But does financial planning necessarily need to be modeled the same way that a traditional industrialized or a post-industrial corporation required fifty to one-hundred years ago? Can budgets be compared in real-time with actual spending patterns to avoid the trap of the annual budget cycle and create greater market responsiveness? The answer is “yes” and with the help of modern-day EPM tools, this is a new reality for many organizations regardless of mission or its market orientation.