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"The budget is a tool of repression rather than innovation" said Bob Lutz the former COO Chrysler. Do you believe this is true or does this simply highlight an in efficient financial planning process?

Adding value to historical data tends to provide reactive solutions. Adding value during the financial planning process provides proactive value adding opportunities and therefore innovation proving Bob Lutz isn't necessarily correct. But what are these opportunities? What examples can you think of? In a master class I'll be taking at the coming 2014 CPA Congress in Brisbane, Sydney and Perth called "Financial Planning and the Strategic Plan" I'll be asking these questions. As a practicing CFO at Radius Care I have a few examples I'll share but would be very interested in other's example. Examples like identifying opportunities to improve a product or service revenue or identifying inefficient spending and including in the budget or forecast so they can be tracked and managed. I'd appreciate your thoughts.

Answers

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

Maybe not inefficient, I may call it restrictive. It also depends on the type of budget one is employing in the company. A rolling budget (for instance) along with the implementation of analytical and process improvement tools will push the organization to constant improvement. It would be more of a culture makeover than just a budget issue. (Think OKRs but for the business as a whole).

I would also look at value added model instead of just looking at specific dollar amounts. i.e. The expense may bring in more sales or customer satisfaction but if you only look at it dollar wise, you are spending more.

The "budget" should also reflect it's priorities or it's value system. ex. Some firms will spend way more money just to satisfy customers (think Zappos, etc).

Todd Boney
Title: Chief Financial Officer
Company: Xceleration Partners
LinkedIn Profile
(Chief Financial Officer, Xceleration Partners) |

When I saw the post, my first reaction was that lines in the road could also be viewed as "repressive" or "constraining"! If that's his reaction, it's more a result of the culture in the company and/or the finance leadership. A budget or forecast is simply a guidepost, it shouldn't be restrictive. A good planning, budgeting or forecasting process is the only way that a management team can agree on priorities and to make sure that the organization's investments are aligned to support those priorities. Variances to budgets or forecasts allow you to understand if the variance is due to a mistake, a change in the environment or a change in the execution of the plans/priorities.

I do agree that a budget can restrict managements execution if it isn't combined with a rolling planning/forecasting process - who can really adequately anticipate the environment and needs in the fourth quarter of the following year (the plan year) when you are working on the plan in the fourth quarter of the current year. Most businesses don't have sufficient visibility to make a concrete decision that far out. If you consider the budget to be the gospel in such a situation, you will restrict management's ability to execute and probably leave the team feeling oppressed or handicapped - I can imagine the response - "stick to your fourth quarter budget and we'll address your needs in the budgeting process for the following year...."

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

A budget is only restrictive if it is viewed as a static plan. Plans should never be static, they need to be dynamic.

The question then becomes how elastic your budget is until you need to rethink aspects of the budget.

Do you have a budget like the Federal Government - keep spending then wake up one day and make draconian cuts or do you just stop spending once you've reached the budgeted amount? For most of us, doing the former is out of the question and the latter has some serious consequences, as mentioned by Emerson.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Budgeting is the only way to perform proper cash flow management. It is a way to foster accountability. Sometimes it is restrictive and that is a good thing. If you have worked with businesses that have multiple lines, you see that different Managers have different opinions regarding acceptable spending levels.

But a proper budget includes the setting phase; with a monthly review of performance - variance review, discussion of why the variance, and a full-year forecast.

A budget will also be more important for small and medium-sized entities that can not recover quickly from a financial mis-step; and the resulting cash flow issues.

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

I would have to agree with Emerson Galfo that the budget, as currently prepared and used by many organizations is restrictive. Furthermore, not using the latest innovations and technology offered in this area make it very limiting and often quite outdated and somewhat useless. Moving to a rolling forecast is a step in the right direction, but only if the company is willing and able to maintain it year-round and analyze its actual results vs. its budget.

What I find more desirable, as new technology is starting to allow it, is the ability to intelligently forecast the entire chart of accounts, arriving at a complete and accurate forecasted balance sheet, from which many attributes of the future financial health of the company can be extracted. Unfortunately, many organizations still only forecast their income statements, usually because traditional forecasting tools (mainly spreadsheets, but also purpose designed budgeting and planning software) are unable to properly forecast the key balance sheet accounts, let alone the entire chart of accounts.

Topic Expert
Jaime Campbell
Title: Chief Financial Officer
Company: Tier One Services, LLC
(Chief Financial Officer, Tier One Services, LLC) |

My startup company's budget is linked to our cash flow forecast, and we update it every five days or so. This sets us free to make purchasing decisions that are in line with our top priorities.

In no way are we limited by the existence of a budget; we thrive because we spend on our top priorities first.

Anonymous
(CFO/Board Advisor) |

I have often said: "Budgets encourage bad managers to spend money they shouldn't ("Its in my budget."), and prevent good managers from spending money they should ("Its not in your budget, no dice."). In my experience, budgets are really there to guide variable marketing/advertising spending and headcount. Things like rent, utilities, legal, accounting, are in the budget, but really they are already known fixed costs, or placeholders for known expenses which will be incurred. You can manage these to some degree, but they are really controlled by outside sources, e.g. You didn't know you would be sued. What are going to do, not defend your company because it is not in the budget?

For me, it is all about headcount, both additions and terminations. This is where a rolling 30 - 90 day budget makes a lot of sense. Same with marketing/advertising expenditures, which drive customers to buy. (Confession, I have a big problem with Tradeshows. They cost hundreds of thousands of dollars each year, and rarely generate a single customer. But, every Marketing/Product/Sales manager will tell you its in their budget.)

Next, is whose budget should the costs be in? Take outside recruiting costs, as an example. Should these be in the departmental budgets or HR budget? What about software or technology costs? Should these be in department level budgets or only in IT's budget?

I see budgets as either enabling bad management or restricting good management. I prefer the rolling Forecast with no more than a 90 day lock on expenditures or headcount additions (with certain exceptions).

Anonymous
(CFO) |

At least for internal purposes, costs should be divided into fixed and variable. That solves many of the problems.

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

It is difficult to aim without a target.

Topic Expert
Ric Ratkowski
Title: Domain Expert Finance & Analytics
Company: SAP
(Domain Expert Finance & Analytics, SAP) |

I don't like the term Budget and think it should be struck from the corporate vocabulary. It is one of those words that get the hair on the back of your neck to stand up and it causes indigestion. Not so much because of the concepts of budgeting but rather how it is implemented within individual organizations (for a fun read you can read all about “What’s Broken about Budgeting? – Part 1” by Gary Cokins at http://cfoknowledge.wordpress.com/2014/09/23/whats-broken-about-budgeting-part-1/ ) .

To answer the original question “[Is] the budget a tool of repression rather than innovation?” If I change the word Budget to Plan (I think of a Plan as a super-set of the budgeting) I would answer, it shouldn't be repressive.

Planning happens throughout the organization, the production department plans, the marketing department plans, engineering plans, but they all plan on a cycle related to the area they are trying to manage with different levels of precision the closer in or farther out in time the plans go. They also use terminology, drivers and methods consistent with the area they are managing but not necessarily consistent with accounting. Production may plan in terms of pieces, pounds, production lines, utilization and scrap %, marketing may think in terms of campaigns, or cost per lead.

The challenge is the word “budget” carries with it the baggage that it is a fixed/static annual financial plan (as commented on by Wayne Spivak). Time horizon is fixed generally at 1 year (although I agree with Emerson Galfo and Alan Hart when they point out rolling budget is a better way to go). The terminology and methods of a budget are generally fixed, it is in accounting department terms, accounts, cost centers, profit centers, etc. and it becomes difficult for individual operational managers to do mental conversion of their plans across different time horizons and measures to the budget.

The solution is to systematize the translation of operational plans (which collectively is a much bigger process within organizations) to rolling financial plans. The annual budget, the stakeholder plan if you will, becomes a time slice of rolling financial plan supported by and linked to the current operational plans, so as operational plans change so does the most current financial plan used to steer the business. And the process as described by Regis Quirin of setting phase; with a monthly review of performance - variance review, discussion of why the variance, continues, the process also includes the operational variances and operational discussions as well (if they didn't already and maybe to a larger degree).

There are companies successfully systematizing this translation. I’ve worked with a number of manufacturers who have taken their “Sales and Operational Plan (S&OP), translated it, added SG&A, treasury costs and capital plans & projects to it and they had their financial plan.

The biggest hurdle as pointed out by comments from Emerson Galfo and Todd Boney, is the company culture around planning. The culture needs to change along with the process to be successful, and that is one if the reasons I prefer the word change from "Budget" to "Plan".

Jennifer Eversole
Title: Partner & Knowledge Enthusiast
Company: Management Stack, LLC
LinkedIn Profile
(Partner & Knowledge Enthusiast, Management Stack, LLC) |

I abandoned the "traditional" budget process several years ago and have never looked back. Instead I use a dynamic rolling forecast which forecasts the entire chart of account (as mentioned by Alan Hart above). The balance sheet forecast is key to keeping tabs on cash position and debt service coverage ratios.

I am a Balanced Scorecard enthusiast and believe that decisions should be made by looking at success through various lenses (perspectives), not just financial results. That being said, the financial impact of decisions absolutely needs to be analyzed for their impact to the financial health of the organization. The rolling forecast is an excellent tool for this type of analysis.

Edward Thill
Title: VP - Finance & Operations
Company: Performance Trust
(VP - Finance & Operations, Performance Trust) |

I do agree that because budgets are static, they are repressive. Plans are dynamic. Plans change in every aspect of our lives. Being able to respond quickly and intelligently to threats and opportunities should be the purpose of a planning process. Traditional departmental budgeting practice lends itself to creation of cost silos that perpetuate inefficient cost structures -- "Because I spent $1M last year, I'll need at least that much this year"; and then fast forward to year end when you scramble to use that full $1M to make sure you don't lose it for next year.

Planning starts with understanding what you're trying to achieve; budgeting starts with what are your constraints. In theory, at a single point in time, you should come to the same result but the mind-set is very different. The one thing you can be sure of is that your budget/plan will be wrong -- your organizational mind-set determines how your managers will react to that variance. Sometimes it's ok to be over budget. Do your managers know that? They certainly won't agree if their personal compensation is dependent on "achieving budget".

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