By Don Howren, Senior Vice President, Global Marketing and Support, ADERANT
The annual budgeting process is a painful lengthy process that consumes teams for weeks and results in a marginally useful plan that isn’t revisited until the next year when the process is repeated. But it doesn’t have to be that way. By implementing a few best practices, companies can condense the budgeting cycle and create more accurate, living plans that better reflect the dynamic nature of business and provide ongoing support for decision makers. In the end, it’s not about the budget; it’s about growth and performance improvement.
The concept is never controversial. Everyone buys into the idea. It’s just that somewhere between ‘concept and implementation’, it goes wrong. Way wrong for too many organizations. So why is it that while everyone believes a formal, iterative planning exercise is a sound business practice to help control and manage business operations, yet more often than not we hear only about all the budgeting exercises that crash and burn? I think “Harvard Business Review” said it best when they described the budgeting process as “something that tends to conjure up in the minds of many managers images of inaccurate estimates, produced in tedious detail, which are never exactly achieved, but whose shortfalls and overruns require explanations.”
Is your annual planning ritual characterized by the following?
- Do you have trouble keeping up with multiple iterations of your budget
- Are you devoting too many resources to number crunching and not enough to strategic analysis?
- Are your budget deadlines too tight?
- Is it impossible to pull together budgets across the organization?
Let’s face it; there are some painful issues that budget managers and analysts must confront during every step of the process. Managing the distribution, creation, and consolidation of budget information, particularly when there are multiple revisions or sets of assumptions, is an extremely laborious task. Electronic spreadsheets have typically been deployed to help facilitate the process, but standing alone they often magnify problems rather than solve them.
This exercise is exacerbated in a day where management asks for more detailed information about business performance that links day-to-day operations with long-term strategy. Something has to change. For many firms it is more than just selecting the right tool for the job. Sometimes the issue is more fundamental – simply creating a budgeting process that works within the framework of your organizational objectives. For firms of all sizes, simply cutting the cycle time to produce an effective budget represents a big win inside the firm. Results of a study a few years ago by AnswerThink Consulting/The Hackett Group found the ‘average company’:
- Spends 95 days and multiple iterations, annually, to complete a budget
- Invests more than 25,000 person days per billion dollars of revenue in the planning and performance measurement process
- Budgets 230 line items, the best less than 40
- Invests 4.5 months, typically, for developing a financial plan
- Requires 21 days to complete a forecast on average
In addition, a PricewaterhouseCoopers study found on average it took organizations 110 days to complete the annual budget cycle. They further found that the cost of this lengthy effort was $60,000 for every $100M in revenues – in the accounting department alone. When you include the efforts of the people involved in this that lie outside of the accounting group, this figure could easily be tripled or quadrupled in most companies.
Faced with the daunting task of applying structure to an unstructured process, how do you ever make the budgeting process peacefully co-exist in your firm?
A key strategy to a successful budgeting process is to match your organizational capabilities and expectations. Strong considerations need to be made for the volume of budget detail; the number of budget participants, business units, and geographies; interdepartmental dependencies; diversity of skills, competency levels, and individual roles.
Furthermore, and maybe most important of all, organizations must focus on budgeting and planning best practices. For many, best practices are easily understood yet represent a challenge to implement. Again, think capabilities versus expectations. It’s worth noting there is likely no single approach that works perfectly for every organization. In reality, you may find yourself adopting elements of several in order to find the right match for your organization. Some examples of best practices are outlined below.
Top Down Budgeting
A high-level target developed by ‘top’ management and communicated ‘down’ through the enterprise. Often these upper management developed budgets establish only targets for the organization. They can be referred to as a ‘10,000-foot view’ of the world and may be vague. Have you ever heard financial performance targets communicated as increase revenue by 15%, or cut expenses by 20%, or increase net income by 25%?
Bottom Up Budgeting
Operating plans constructed by line management or department heads at the ‘bottom’ of the enterprise and rolled ‘up’ to derive enterprise-wide financial targets. When a budget is simply implemented from the bottom up, it is rarely approved on first pass as it was probably developed without sufficient guidance from upper management regarding strategic direction, anticipated economic conditions, new or discontinued products, etc.
Business Drivers
Measurable events that directly impact business unit performance and may be influenced or controlled by a business manager. As long as these drivers and their relationships can be defined, the entire revenue budget for the year can be changed by simply updating a few assumptions. Driver definition is the hard part.
New Look Budgeting
A forecast through the current year-end that incorporates year-to-date actual along with a revised budget.
Rolling Forecasts
Similar to a New Look, except at each quarter end, a new quarter is ‘appended’ to the budget, so there is always a four-quarter plan in place.
Many organizations now begin with a top-down target based on a set of economic, strategic and market assumptions, but the actual budget is developed in a bottom-up fashion. Look for solutions that help facilitate the communication, management, and reconciliation of a top-down to bottom-up process. By leveraging business planning solutions, organizations gain more control over every phase of the budgeting process and can develop more realistic, flexible plans that better meet the dynamic needs of the business.
The real answer for most firms is generally somewhere in between all these best practices. Here are some things to keep in mind.
- Reduce the time allowed to develop the budget.
- Reduce the number of iterations allowed during development.
- Reduce the level of detail in the budget.
- Use budgeting productivity tools.
- Consider external, non-financial, longer-term influences.
- The most effective budgeting exercises are iterative and dynamic. Firms need to react to change quickly. Effective planning cycles happen throughout the year, not just once a year. Your process needs to help your firm manage the requirement for an iterative planning process.
- Strive for a balance of planning and analysis. A big win for every firm is to shorten the mechanics of the planning cycle and help companies focus on the analysis of their business.
- Look to performance improvement as a by-product of the budget process. This really is an extension of improved analysis; the ability to hone in on areas of the business that are not performing well. Adjust drivers and assumptions to refine ‘go-forward’ performance.
In the final analysis, set reasonable goals. Remember, it’s about improvements in operational excellence, not about ‘budgeting’. Your business is fluid so your process needs to be dynamic, iterative, and participatory. If not, you’re not really aligned with the reality of the changes happening to your firm. The concepts of planning and analysis are synergistic and not separate and distinct activities. Play what-if games; look to model business scenarios to reflect the dynamic nature of business and allow for more than one set of possibilities. Strive for predictability in your business, to identify opportunities and risks, and leverage historical data as a basis for decision-making.
The best budgeting process is one that doesn’t disintegrate into a lost effort. It’s time and motion you’ll never recapture. And by the way, your colleagues will really thank you for it.
Don Howren is Senior Vice President of Global Marketing of ADERANT, a leading provider of software for services organizations. He is responsible for the global product support team. Don leads the global marketing team responsible for promoting the ADERANT brand, as well as all products and solutions. He has more than 18 years experience in the enterprise application software business and relative experience includes senior management positions at Talisma, a leading CRM provider; Accruent, a provider of enterprise contract management solutions; Mindarrow Systems, Inc. (NASDAQ:ARRW); Best Software, Inc. (NASDAQ:BEST); and Epicor (NASDAQ:EPIC) formerly Platinum Software Corporation. For article feedback, contact Don at
don.howren@aderant.com
 
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