Are you and your colleagues spending large chunks of time throughout the year on budgeting and planning? Does it have to be this way?
One of the most frequent complaints I hear from managers is the complexity, detail and length of the budgeting and planning process — a process where they feel the massive data effort is not at all commensurate with the value created.
Would love to hear your thoughts here and on my related blog entry on the Harvard Business site: http://tinyurl.com/BattyBudgeting What's behind the pervasive sense that the budgeting process is broken? What can be done to make it simpler and add more value?
Answers (6)
Maria M
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The large chunk of time I spend is spent creating a one page business plan(r) and then executing it.
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The question is based on a premise that the budgeting process somehow creates value. This is not necessarily the case.
A budget is simply a set of expectations based on past data that establishes targets and limitations. It is a guideline. The enhancement of value or the attainment of the mission is achieved through opportunity recognition, mobilization of resouces and effective actions.
One of the problems with budgets is that they are often created in the financial section of the entity and reduced to G/L based numbers on a P & L statement. While not deprecating the importance of the bottom line over a reporting period it is not necessarily the most effective means of evaluation of success as defined above.
The P & L will reflect the attainment of (or shortfall against) a revenue target and the ability to function within resource limitations. It does not measure opportunity recognition. It does not measure true potential.
It does not measure sales leads developed. It does not measure adjustment to technological change. It does not measure vision of upcoming events or trends. If anything, budgets narrow the focus instead of broadening it.
The even larger problem is the use of budgets in compensatory evaluation as salaries and bonuses become conditional on meeting or surpassing them. The emphasis becomes the attainment of an inferior level of achievement. The result is often financial sleight of hand and subterfuge to validate it.
None of this can be good.
How do we simplify? Take out the compensatory aspects. Broaden the focus to non-monetary facets of the work. Reward new ideas build compensation items into their success, not the maintenance of existing business lines.
Rohan B
Managing Partner: 3resource LLP, Finance & Strategy Business Partners; Co-founder &Brand Ambassador - The Conscience LLP
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Ron,
I have a very simplistic (or call it cynical) view of the world when it comes to budgeting.
I call it the "Annual Organisational Lying Ritual" or by its actual name: Managerial Bonus Planning.
My view is that this is all the process is good for.
No value gets added, but an enormous amount of resource (and opportunity cost) gets expended on it.
Consider in its stead a rolling forecasting system, but keep it simple, efficient and easy to maintain. Use your KPIs and Management Information systems more effectively, aligning what the organisation does (serving customers in one way or another) with slick processes in order to meet those customer needs and try to do this by maintaining as large (wide) a profit margin as you can realistically get away with.
Keep internal distractions to a minimum and focus on external surveillance and the competitive forces trying to diminish your profit margins and market share.
Increase the drum beat of the organisation and keep the troops marching and concurring that empire.
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Clarification added 2 months ago:
Oops Ron, it should be conquering that empire....
Gwendolyn L
Accountant at The Billups Company CPAs Inc.
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I find that most of my clients will focus on budgets for their sales team. They also focus on short term goals. I've had clients try to focus on long term budgets for how profitable a new client actually is and then base the commission on that. This stops the sales team from bringing in clients that are good at first and deteriorate rapidly. Believe it or not a client can end up costing you money.
Its easier to keep good customers/clients than to get new ones. Same goes for employees.
A budget for a sales team should be separate from the companies overall performance. Each department should have their own budget. Alerts that happen if expenses rise rapidly. I have never seen a master budget actually help. Maybe it only works for the giant companies.
Clarification added 2 months ago:
This kind of answers your question. I find that its easier to make budgets in segments and then add a percentage increase based on the overall business environment. This is what the CFO is for! Then apply it. Otherwise I find companies have budget meetings just to have meetings. People need to learn how to conduct meetings. I think that's the major problem.
What can be done to make it simpler?
I think you should review the budget process esp..in budget preparation and approval phase. Determine where you can still improved to expedite the preparation and improve accuracy - financial soundness of the budget. Pls take note though less detail or complex or simpler may result to less accurate budget. Here are some points to consider that may help. Who are doing the budget? I believe if all depts - cost/revenue centers from sales, marketing, operation and support group are involved in this yearly activity it will likely expedite the process, improve the accuracy of the budget and of course create ownership and accountability. This is very important later own when you make your monitoring - variance of actual and flexible budget. Are they equipped? Is their sufficient support from Acctg/Finance? Is there a budget assumptions provided?Are they provided with historical data to aid them in budgeting? What is your budgeting technique - zero base/activity base, incremental or combination? How detailed is your budget? Most often a budget template even in excel format will help or much better if you can automate budget preparation. Budget review/approval is very important esp if commission or incentive of managers is linked performance report (actual vs budget).
What can be done to add more value?
Let me discuss first the benefits of budgeting to emphasis its value... it will force dept managers to plan or planned activities that are aligned to strategic goals of the company. No question that planning is important in any organization. If all depts are involved in budgeting, since depts are interrelated it will improve coordination and instill financial mindset/consciousness in the organization. Budget also is a forecasting tool, it can help financial analyst predict what will likely occur in the future and make corrective action plans beforehand esp on adverse situations. Its purpose can also be as budgetary control. A monitoring of Actual vs Budget prepared on per dept at interval or period is also helpful. It will highlight variances that could be indicators of inefficiencies or problems. Linking the performance report or variance report to manager's commission/incentives or even to balance scorecard will also add value to the budget.
Suggest that you take a look at Ron Baker's book "Measure What Matters To Customers".
His thesis is that Key Performance Indicators are looking backward -- and that you need to identify Key PREDICTIVE Indicators.
I think that it's interesting that your question seems to assume that planning and budgeting are one process and that process is once a year.
Effective management of an entity with substance requires ongoing measurement, evaluation, and re-alignment of efforts.
With respect to your statement regarding the "pervasive sense that the budgeting process is broken", my experience has been that there are two key issues that feed such feelings: 1) failure to get reports out on a timely basis; and, 2) weak or incomplete analysis of variances.
Late reports result in managers feeling like they cannot affect changes on a timely basis and poor variance analysis often result in erroneous decisions.
