Gain The Financial AdvantageGain The Financial Advantage

Adjusting to changing business conditions is why the Canadian division of Nestlé Purina PetCare Co. uses budget-forecasting tools to create rolling one-year financial forecasts. The company uses budget-forecasting software from Prophix Software Inc. to crunch sales-volume estimates from its sales organizations and the costs of ingredients, packaging, and other materials needed to manufacture products to meet those expected sales.

Forecasts can be quickly adjusted to reflect changes such as a poor crop harvest that increases ingredient costs, says Derek Thompson, financial-planning and product-demand director. "We can reforecast on the fly to see what the impact is going to be," he says. Those changes can be made in as little as an hour, compared with as long as 2-1/2 weeks when the company used mainframe applications and 170 separate spreadsheets for budget planning.

Accurate sales and spending forecasts help managers at Kana Inc., a developer of customer-relationship management apps, decide whether they have the resources to pursue business opportunities or let those opportunities pass, confident in the knowledge they made the right decision. "Now we don't get surprised," finance VP Joe McCarthy says. Kana forecasts operating expenses on a quarterly basis as far as six quarters out using software from Closedloop Solutions Inc. It uses its own CRM applications to predict sales.

Budget-planning and forecasting applications also help businesses in the heavily regulated financial-services industry. For example, first Fed America Corp. develops forecasts using budgeting tools from SRC Software Inc. to provide the Office of Thrift Supervision with earnings and risk-assessment forecasts.

How far out can forecasts go? Nestlé Purina, which forecasts sales and spending for one year, plans to extend that to 18 months. Boston Beer wants to do rolling quarterly forecasts "as far as we can go," Bustos says. Hendrick Motorsports, which uses financial-analysis apps from FRx Software Corp., forecasts expenses for its five racing teams as far out as five years with updates every six months. Other companies also prepare five-year revenue and spending forecasts, although they're generally not very detailed.

Just how companies should use those forecasts is open to debate. Kana's McCarthy says forecasts should be like a real-time stock ticker, continuously updated to reflect changing circumstances. But Hendrick CFO Lampe worries about his company's reacting to every update. "My concern is that a rolling forecast becomes an 'adjust-to-actual' thing," he says. While forecasts should be adjusted for uncontrollable events such as fuel price increases, adjusting for every business decision could bog management down in short-term reactions rather than long-range planning. "I'm just not sure we're in the right business for a rolling forecast," he says.

There's a consensus, however, that more people need to be involved in the budget preparation and forecasting process. And the software tools on the market today help finance managers do that. Input from a greater range of employees, such as sales managers and department heads who are closely involved in day-to-day operations, generally means more accurate forecasts.

At Nestlé Purina, department managers already do their own budgets using Prophix and send them to a master database. "I have a national picture in minutes," Thompson says. Bustos wants to create a system at Boston Beer that will let anyone update forecasts whenever necessary. Top financial managers generally don't like to relinquish control of the process, he says, but opening up the budget planning and forecasting will help more people understand the impact they have on the bottom line and hold them accountable for their decisions.

Kana's McCarthy recalls a management meeting two years ago when a question arose about the company's research and development budget and everyone looked at him even though the head of R&D was in the room. "Our approach was too finance-centric," he says. With Closedloop, more budget-forecasting responsibility is pushed out to department heads, resulting in more accurate forecasts. Departmental managers today provide the bulk of spending data for forecasts, including salaries and travel spending, while the finance organization provides data on expenses such as payroll taxes, capital spending, and depreciation.

Hendrick Motorsports is taking the same approach, pushing responsibility for assembling spending forecasts out to crew chiefs that manage the company's racing teams. "I've got to believe that the more people we get involved, the more accurate the forecasts will be," Lampe says. That, after all, is what gets you across the finish line.

Photo by Richard Barnett/Getty