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A major benefit of deploying corporate performance management (CPM) software is the ability to use CPM analytical...
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tools as a company creates its annual budget -- a budget designed to allocate resources to ensure both the profit potential and operational efficiency of all divisions in the company.
During the budget cycle, each division (and departments within divisions) create preliminary budgets to be reviewed by management. This begins an arduous set of tasks that results in the creation of final budgets.
Budgeting requires first-rate analytical tools
The quality of the final budget requires first-rate analytical tools that help convert the work in progress to an optimal budget. The hypothetical example below (a company called Earth Movers) illustrates the power of CPM analytical tools. Earth Movers
- sells and leases earthmoving equipment;
- sells spare parts;
- offers repair services;
- operates six retail stores;
- is in a highly competitive market; and
- has a revenue target of $120 million.
Each of the six retail stores creates a budget indicating its revenue targets for sales, leases, repairs and spare parts. The budget will be broken out by type of equipment and spare parts inventory.
The manufacturing division creates a budget that deals with procurement of raw materials, managing factories, creation of finished goods and spare parts, and shipment of product to retail stores. Human resources (HR) creates a budget to ensure that all operating divisions are properly staffed.
Applying CPM analytical tools to the budgeting process
In our example, you'll see that CPM tools are deployed to help build a single database structure, with added emphasis on multidimensional databases. Then, added value is derived through financial modeling.
Earth Movers has at least eight distinct budget components -- six for the retail stores, one for manufacturing and one for HR. Although the budget structures are different for the stores, manufacturing and HR, it is highly useful to store the budget data in a single database. Manufacturing must supply stores with inventory; HR must ensure adequate staffing for manufacturing and the stores. With a single database, there is one source of truth for the entire budget cycle.
Aside from row-and-column relational database tables, there is also great value in storing data in a multidimensional structure. Consider the inventory of earthmoving equipment. The dimensions of interest include the manufacturing date, the retail store shipped to, the sale date, the latest lease date and the date the product came off lease. Related factors would include the sales price, the lease price and the repair cycle (for leased equipment). For example, storing data in this manner allows analysis of product by store by time, or store by product by time.
Suppose that each of the operating units has prepared its budget for management review. The database of results must be tested for feasibility. Consider the requirements of each retail store:
- New earthmovers for sale
- Earthmovers for lease
- Spare parts for sale
- Spare parts for repair and maintenance
- Refurbishment of earthmovers coming off lease
Consider add-on tools to support budgeting
Management must determine whether it has enough manufacturing capacity to meet these requirements. HR must determine whether it has adequate staffing. Because the data for manufacturing, staffing and retail sales is highly interdependent, it would be very useful for the database system to allow definitions and formulas. For example, a new headcount formula might budget one headcount for every $500,000 in sales.
Consider tools like driver-based planning (as a budgeting software feature) and financial modeling (as an add-on product), both of which I have written about in previous articles. Moreover, the system should allow for the easy creation of key performance indicators (KPIs), which can be used in a variety of analytic tools, as described below.
Now that we have all the data and some equations in place, we are ready for tools to analyze the data.
CPM data visualization consists of bar charts, pie charts, line charts, stoplights and gauges, all of which allow for improving and communicating the budget. These charts can be pushed to the user when key results change, pulled by the user on demand, or published regularly. These outputs should be annotated as part of a report book, and published to a list of financial executives.
CPM systems should come with a sophisticated report writer, providing great flexibility in row and column tabular reports, which can be included in report books as well.
As you can see, the Earth Movers example illustrates several important points about obtaining benefits from CPM analytical tools and budgeting products. Preliminary budget results should be stored in a single file system, with emphasis on multidimensional file structures. The data should be enhanced with KPIs, driver-based planning, equations and financial modeling (for more advanced analytics). The enhanced data should be analyzed through the use of report writers and advanced graphics.
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