A genie in a bottle

Cost allocations to the various cost heads, during the planning exercise, is a deceptively simple exercise, whether you choose to use the direct allocation method, step-down method or the reciprocal method to allocate costs. After all, what more do you need than the total amount that needs allocating, a basis for the allocation proportions to be calculated and finally, the allocation calculation itself? However, with traditional planning platforms like spreadsheets and standard solutions to automate the planning exercise, allocations can turn out to be quite the tricky exercise, the pains of which are well known to the implementers and end users.

Let us take the example of the ubiquitous spreadsheet. The value that needs allocating is easily arrived at. An example would be the rent for warehouses. All the user needs to do is use the summation feature of the spreadsheet that holds the data points. Now, once the total rent has been arrived at, the rent needs to be factored in as a cost for every unit that is manufactured. There could be two approaches to this. One is to arrive at the total number of units manufactured and apportion the rent accordingly. The second would be to determine the through-put of the manufacturing unit for a period of time and use that to calculate the basis on which the rent would be spread across the cost heads. All of this can be built into a formula within the spreadsheet or be referred to from values held in cells. But maintaining these values and in cases of complex, multi-step or reciprocal allocations, it is not only hard to build the logic of the allocation, but also to trace the calculation for the allocation process.

This normally results in sheets that are bulky, are peppered with cross references to cells and values, which are rather obscure given the traditional spread sheet terminology of building calculations, with limited options of building in checksums to ensure that the allocations have been carried out as required.

This aspect of spreadsheets and their rather top heavy nature, prompted countless users and firms to migrate to an automated platform to run their planning exercise on, including complicated allocation procedures. However, from experience, managing to write business rules that are (a) easy to comprehend, (b) a cinch to maintain and (c) run without a glitch at all, is not a walk in the park. Far from it, they can turn out to be gruelling climbs up slopes of shale. Tricky footing and massive effort for every step taken. An uncomfortable chip on every EPM expert’s shoulder is the avoidance of circular references when writing a rule for a multi-step or reciprocal allocation.

Through all of this clutter, Adaptive Planning has by far the easiest platform to manage allocations. The allocation rule manager is the quintessential genie in the bottle that you heard about as a child. It not only grants your wishes when it comes to allocations made easy, but it does so in a fashion that is as easily understood by the child to whom the story was recounted to, as the most seasoned FP&A professional.

The Allocation Rule Manager is split into various self-explanatory fields. It gives you, through an intuitive GUI, the Source and Target Levels in the organisational structure, the accounts through which the amount to be allocated is routed through, a field to define the allocation value through a formula and a field, which lets you define the allocation basis and the ratio in which to the apportion the costs.

Let us take it each step and talk about how it works.

Allocation Manager

The Source Levels field defines the level in the Organisational Structure from which the allocation value is obtained. In our example, we are allocating the expenses borne under the aegis of General & Admin and allocating them to the levels mustered under Operations Domestic, Northwest and Southeast, as seen in the Target Levels field.

Now that the levels have been selected, to ensure that the original value in the General & Admin account is not affected by the allocation through a circular reference, an Allocation Out account is defined and selected. The purpose of this account is to hold the value to be allocated Similarly, the system also helps in maintaining the data integrity for the final allocations, by routing the allocations into an Allocation In account, from which it rolls up to the level desired.

Then comes what is the most elegant portion of this design; the formula to derive the amount to be allocated, which is through a user defined formula, allowing the business to define exactly what needs to be allocated, sans the ambiguity inherent in spreadsheets or complicated business rules.

Allocation Rule

Once the value to be allocated has be arrived at, the user can assign the formula for the method in which the allocation is to be carried out; which in this case is the share of revenue generated by the geographically segregated operations.

On the adjoining tab, the Allocation Rule Manager allows you to utilise several of Adaptive Planning’s impeccable features, which include (a) multiple versions, (b) customised time periods and (c) preserve dimensional attributes for the data, maintained in Adaptive Planning’s multidimensional cubes.

To summarise, with a few clicks through a GUI, we have defined an allocation rule that will apportion G&A expenses, across the organisational levels for geographies, based on their share of the total revenue generated. But that is not all, the rule takes into consideration the version in which to run the allocation, the time period within which to collate data and very importantly, preserve the dimension attributes of the source data at the Target level.

The allocation rules run in the background, automatically and in real time, doing away with the need for cumbersome task lists and time consuming rules being run before viewing the results. One can, as easily, create multiple rules and arrange them in the sequence they are supposed to run in.

EPM suites and platforms, which move users away from the spreadsheet, are meant to make the planning process as effortless as possible for the end users. And the best way to ensure that is to use a platform that is lucid and flexible enough for the end users to use and maintain on their own, with minimal intervention from IT personnel. The Allocation Rule Manager of Adaptive Planning, does just that. It truly is a genie let loose on your planning exercise, to fulfil your wish for a quick, easy and accurate budgeting cycle!