How many people in your organization love the annual budgeting process? Probably none. The mere mention of the name “budget” raises eyebrows and evokes cynicism. It should. That’s because the agonizing annual budget process may include:
Obsolete Budgeting – The budget data is obsolete within weeks after it is published because of ongoing changes in the environment. Customers and competitors usually change their behavior after the budget is published, and a prudent reaction to these changes often cannot be accommodated within the budget. In addition, today’s budget process takes an extraordinarily long time to create, sometimes starting six months in advance during which time the organization often reshuffles and resizes.
Bean-Counter Budgeting – The budget is considered a fiscal exercise produced by the accountants that is disconnected from the strategy of the executive team – and from the mission-critical spending needed to implement the strategy.
Political Budgeting – The loudest voice, the strongest political muscle, and using the prior year’s budget levels as a baseline should not be valid ways to award resources needed for next year’s spending.
Over-Scrutinized Budgeting – Often the budget is revised midyear or, more frequently, with new forecast spending. Then an excess amount of attention is focused on analyzing the variances between the actual and projected expenses. These include budget-to-forecast, last-forecast-to-current-forecast, actual-to-budget, actual-to-forecast and so on. This reporting provides lifetime job security for the budget analysts in the accounting department.
Sandbagging Budgeting – The budget numbers that roll up from lower- and mid-level managers often mislead senior executives because of sandbagging (i.e., padding) by the veteran managers who know how to play the game.
Blow It All Budgeting – Reckless “use it or lose it” spending is standard practice for managers during the last fiscal quarter who are not on the glide path to spend what they were allotted. Budgets can be an invitation to managers to spend needlessly.
Wasteful Budgeting – Budgets do not identify waste, unused capacity, or low productivity because they not visible from the prior year’s spending. In fact, inefficiencies in the current business processes are often “baked into” next year’s budget. Budgets do not support continuous improvement.
The annual budget is steeped in tradition and ingrained in an organization, yet the effort of producing it arguably outweighs the benefits it supposedly yields. How can budgeting be reformed? Or should the budget process be abandoned altogether because it can drive behavior counter to the organization’s need to rapidly respond to changing goals? That is, by having end of fiscal year fixed targets, managers will view them as a “contract” for them to meet when they should be shifting their priorities. And, if the budget is abandoned, then what should replace its underlying purpose?
A Sea Change in Accounting and Finance
How can budgeting be reformed? To answer this let’s first step back and ask some other broader questions. What are the impacts of the changing role of the chief financial officer (CFO)? How many times have you seen the obligatory diagram with the organization shown in a central circle and a dozen inward-pointing arrows representing the menacing forces and pressures the organization faces – such as outsourcing, globalization, governance, brand preservation and so on? Well, it’s all true and real. But if the CFO’s function is evolving from a bean-counter and reporter of history into a bean-growing strategic business adviser and an enterprise risk and regulatory compliance manager, what are CFOs doing about reforming the archaic budget process to be more reflective of forecasted demand and projects?
Progressive CFOs now view budgeting as consisting of three streams of spending converging into a river
Recurring expenses – ongoing resource capacity planning similar to 1970s factory managers projecting the operation’s manpower planning and material purchasing requirements.
Non-recurring expenses – the one-time investments or project cash outlays necessary to implement capital projects, strategic initiatives, and risk mitigation spending.
Discretionary expenses – optional non-strategic spending.
An Integrated Financial Management Platform
Today’s solution to solve the budgeting conundrum and the organization’s backward-looking focus is to attempt to create a single integrated business intelligence platform – together with its cloud-based reporting and analysis capabilities. Speed to knowledge is now a competitive differentiator. Today there are many software vendors who provide these capabilities.
The emphasis for improving an organization and driving higher value must shift from hand-slap controlling toward automated forward-looking planning. With a common platform replacing disparate data sources, enhanced with improved data integrity, cleansing and data mining capabilities, an organization can create a flexible and collaborative planning environment. It can also provide on-demand information access to all who need to perform what-if scenario and trade-off analysis. For the bold CFO not wary of radical change, continuous and valid rolling financial forecasts can replace the rigid and static annual budget. Today, organizations need to be able to answer more questions than “Are we going to hit our numbers in December?” That’s not planning but rather performance evaluation. For the more traditional CFO, the integrated data platform offers a sorely needed upgrade toward a more high-speed budgeting process.
Enterprise performance management (EPM) methods resolve major problems: lack of visibility to causality, unit-level cost consumption rates to calculate the required capacity (e.g., headcount spending) based on forecasted demand, lack of timely and reliable information, poor understanding of the executive team’s strategy, and wasted resources due to misaligned work processes. EPM methods provides confidence in the numbers, which improves trust among managers.
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