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Vow to Make Budgeting Reasonable

Very soon, most Proformative readers will be neck-deep in developing next year’s budget. Perhaps now is a good time to think about the pain imposed on business managers by convoluted budgeting. Think too about what you’re asking your finance staff to endure.

Sure, many factors can be blamed for the inevitable disputes. There may be ridiculous growth targets tied to some evangelist’s notion of the company’s ideal value. There may be CEO pet projects that add bloat to the management charge that’s allocated across the enterprise. There may be too many superfluous line items that require computation. And there may be myriad “blind spots” that keep finance and line managers alike from seeing the business’ underlying drivers of revenue and cost. These are just a few of the things that keep annual planning and budgeting dysfunctional. Any or all of these things can spark distrust and tension between controllers and their operating counterparts. Forget about becoming a strategic business partner in that atmosphere.

Is your budgeting regime currently reasonable? One metric from APQC's Open Standards Benchmarking® repository offers a way to test for a symptom: the number of budget iterations before final approval (see chart).

The top performers, those in the top quartile, are finished after four or fewer go-arounds. The bottom 25 percent of our study set suffers through twice as many (or much worse) before wrapping things up.

Number of Budget Iterations Produced before Final Approval

 

You won’t have enough time before budget season dawns to launch an effective overhaul of the budgeting approach. But it could be a smart move to keep an eye open as you along for what should be fixed. When the 2017 budget is finalized and delivered, figure out the sequence of remedial steps you can take to change things up for next year.

Set up a worksheet that has three columns displayed across the top: Stop, Start, or Continue. Perhaps ask your staff to do the same. As you soldier through this year’s exercise, assign budgeting tasks or rules to the category that feels right: Stop, Start or Continue. When all the hub-bub is over, convene your colleagues for a few brainstorming sessions. As a group gain consensus on the most egregious tasks, dumb do-overs, or data mash-ups that can be slated for change.

You can also ask an industrious staffer to start searching for and collecting articles that highlight best practices in budgeting and planning. Goodness knows, there are plenty publicly available. Just steer clear of philosophical debates about the folly of using the annual budget as your primary performance management tool. You already know that’s a silly thing to do.

Comments

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Hi Mary

Thanks for provoking some thoughts with this article. I wanted to ask what you, and the Proformative community, think/have experienced about budgeting exercises that are wasted effort because:
1. a poorly defined/communicated business strategy exists
2. the board/execs do a poor job of providing strategic direction ahead of the start of the budgeting process

which may often lead people to ask -so what on earth are we planning for?

In my view, how about the CFO advising her/his peers that s/he requires them to consider what strategic factors are relevant for this year's budget. Then pay attention to that aspect of the "budget process" and reduce effort in other areas.

Thoughts anyone?

Topic Expert
Mary Driscoll
Title: Senior Research Fellow
Company: APQC (American Productivity and Quality ..
(Senior Research Fellow, APQC (American Productivity and Quality Center)) |

Hi Len, yes, you are on to a big part of the problem. Research shows that most finance leaders are quick to acknowledge that budgets are not aligned with strategy. If not strategy, then what? Well, turns out vast majority rely heavily on "last year plus percentage gain" for target setting. In this environment, how can this be? Why is this?? Love to hear reasons why??
Thanks, Mary D

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

More often than not, "last year plus %" is a telltale sign of a company that is just "coasting along". When value creation is the main focus, there are big changes to budgets since last year's model is outdated compared to what the company wants to accomplish. Also, REEVALUATION of relevant and existing data and assumptions should be part and parcel of the budget process.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I have found that sales/marketing shy's away from participating in the discussion.

Maybe because they were never taught how to budget, maybe they don't want to go on record (but they sure want those commission deals) and then it's left to the CFO who really doesn't have a pulse on the channel, because they don't work the channel.

Topic Expert
Alan Hart
Title: Consultant
Company: Pacific Shine Group
(Consultant, Pacific Shine Group) |

Great discussion topic here and let’s hope for a wide member participation. You may have heard the saying: “All budgets are wrong, some are useful”. The reality is that many corporate budgets are not only wrong, they can never be useful due to the inherent process flaws and the heavy reliance on user computations of the various models the final budged is comprised of, making these models error prone and difficult to update and maintain year-round.

My experience shows that no matter how you arrive at a final, approved budget, you have to be able to drive a full set of forecasted financial statements from it including a balance sheet and a statement of cash flows which must be synchronized to the underlying budget. So you have to rely on a sensible, reasonable approach where you can use the budget to forecast critical account balances (e.g., cash, AR, inventory, etc. and not just your P&L) throughout the entire budget period.

If you have a periodic forecasted balance sheet, automatically generated from the budget, you can reasonably forecast and understand the organization’s future financial health; things like key financial ratios, future compliance with financial loan covenants, cash balances and need for additional borrowing, selling assets, etc. As you update the budget, this balance sheet and all its derived financial ratios will also update.

As a consulting firm specializing in accounting and finance matters we are starting to see a trend developing toward this approach, even in smaller companies and relying on new technology products in this area. This approach, however, needs a lot of cultivation among corporate finance leaders and managers, but I think we’re off to a good start.

Despite all this, we still see many organizations’ budgets that are hard to implement and maintain, especially those with no meaningful output which are not going to be useful and often become obsolete as early as the beginning of the new fiscal year. I’ve commented before that if you cannot use your budget for its intended purpose, you probably shouldn’t do it at all.

I’d like to hear more opinions on this critical topic.

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