Game over for Traditional Budgeting?

Budgeting has traditionally been an annual process: Business goals are set and resources are allocated towards achieving those goals. Typically, finance professionals have spent months struggling to establish and track these largely static budgets, often involving massive amounts of manual work with a correspondingly increased risk of error. It also often the case that the Board’s meeting calendar dictated the timetable, not real world changes to the business's operating or competitive environment.

 

Is it any surprise, then, that a common theme across the businesses community is of a fundamental dissatisfaction with the overall budgeting process, bringing with it a widening realisation that classic budgeting techniques are largely proving inadequate in our fast changing world? Indeed, is the traditional annually-prepared budget becoming an obstruction to a company’s own success?

 

The End of Budgeting as We Know it?

 

Advances in technology are leading to an ever-faster transfer of knowledge and information. Every company, no matter how locally focused, is now global impacted. Events that happen in one country can now impact on businesses worldwide, making it very difficult for them to make meaningful assumptions about the future. The rising level of complexity of the markets in which companies are operating in terms of products, selling channels and competition adds to this challenge.

 

The fast pace in which the world is changing means the traditional lengthy budget cycle is delivering assumptions essentially obsolete by the time the budget is finalised and ratified by the Board. Not only does this lead to in ineffective budgets, it creates a constant need for finance teams to explain why assumptions made last year are now incorrect rather than identifying performance drivers that may enable the business to compete more effectively in the future.

 

Many believe that sticking to their budget will not encourage or deliver outstanding performance, given the firmly established relationship between budget performance and remuneration ingrained into many business cultures. The entire budgeting process is fraught with politics and emotion, with ongoing iterations and fraught negotiations lengthening the cycle yet further.

 

Budgeting for Success

 

Budget standards are changing. Having spent the last 10 years working as the Head of Group Financial Planning and Analysis (FP&A) for some of the UK’s most successful multinationals, I’ve gained first hand experience in how top performing companies have managed to shorten their budget process and adopted new methods and best practices to make budgeting more meaningful given our fast paced global economy.

 

 

  1. Top down strategy & deadlines

A business’s longer term Strategy, which should be driven by the Board of Directors, should form the foundations of the budget and be led from Executive level. A strategically aligned budget adds value to the business and will help guide it towards achieving its strategic goals.

 

Ensure there is absolute top down agreement that the budgeting calendar is carved in stone. Staff must be held accountable to missed timelines and milestones to stop the budget process from dragging on indefinitely.

 

 

  1. Adopt a LEAN approach to data

The more data that is produced the more data that needs to be reviewed, leading to increased error and complexity and a lengthening of cycle times. Focus on key drivers, risk metrics and the underlying assumptions. Avoid spurious levels of accuracy and give more attention to the things that are material and volatile.

 

 

  1. Use of smart technology

Move away from spreadsheets. Ensure that all planning platforms are integrated into the rest of your reporting and financial management framework. Use standardized templates. Governance and consistency across these processes will save time and improve projections.

 

Global assumptions and shared drivers that are applied to both the business and the budget will also lead to greater a transparency and make for better decision-making.

 

 

  1. Be Dynamic

Develop a budget process that is flexible and reactive to change. Use the budget as a continuous form of planning – update the budget and other targets in reaction to real-world operational and market changes in order to create rolling forecasts. Rolling forecasts in turn accelerate subsequent budget cycles.

 

 

  1. Remove links between staff remuneration and performance vs budget

Depoliticise the budgeting process. This will help to depersonalise budget negotiations, reduced sandbagging, and naturally shorten the budget cycle. Instead, tie bonuses to absolute performance and whether or not the business outperformed its competitors.

 

 

  1. Shorten the timetable

Give yourself less time; shorten the budget timetable length. Force people to focus on the bigger picture, as there will be limited time for multiple iterations and negotiations.

 

Conclusion

A culture shift will be required for many organizations to move from the traditional budgeting approach. Traditionally, budgeting has been so intertwined with staff bonuses and performance targets that any change to the status quo will naturally face some resistance.

 

The world is changing fast, requiring faster and more agile business decision-making. Staff and directors alike will need to embrace this change if they want the organizations that they work for to remain competitive in the global market.

 

It’s game over for the traditionally standalone, annual budget. We don’t need to kill the budget, we just need to make it work more effectively and ensure it's integrated into an ongoing discipline of rolling forecasting.

 

The time to evolve is here. Contact us now and begin your journey from ‘traditional’ to ‘best practice’ budgeting and forecasting.