What role does the traditional budget, the antithesis of agile & flexible planning, play in the modern world of market disruption and volatility? How does something which screams micromanagement, number worship, rigidity, secrecy and hierarchal control still achieve unconditional religiosity across the corporate world?
These were just some of the discussion points covered at the recent FP&A Board, Geneva organised by Larysa Melnychuk (FP&A Trends) and sponsored by the Association for Professionals (AFP), Page Executive and CCH Tagetik where more than 25 senior finance and FP&A executives gathered to find some answers.
Here’s some interesting statistics from the group discussion (0 = not too painful to 10 = extremely painful):
Q: How painful is the budget process? Answer = 8
Q: How quick is your annual budgeting process? Answer = 50 percent of respondents answered 1-3 months
Q: How quick is your forecasting process (should be less than three days)? Answer = 83 percent said more than three days, of which 43 percent answered more than seven days.
Companies who have taken steps to abandon budgeting, in favour of a rolling forecast, apparently perform better than those who stick to traditional budgeting methods. Others decry the loss of a holistic view of their company in its absence.
“Making a budget is an exercise in minimization. You are always trying to get the lowest out of people, because everyone is negotiating to get the lowest number” -- Jack Welch (GE, CEO 1981-2001)
The general consensus conceded a move beyond traditional budgeting does not necessarily mean losing the budget. Rather, it’s important to reduce some of the traditional planning approach and taking a modern, flexible view of how to best remain agile and perform better. Initiating a change in budgeting philosophy, improving stakeholder relationships, introducing a rolling forecast preferably powered by data analytics and developing an ongoing gap analysis between the budget and rolling forecast, were some of the groups experienced suggestions.
Company culture also plays a big part in driving a fundamental change in philosophy. Change starts from the top; suggestions included developing a more KPI-driven corporate mindset, improving internal communications and stakeholder relations, understanding your business better, making processes less painful, as well as adding flexibility were mentioned. Considering a test pilot to one business unit to see how it works was an interesting consideration. One common denominator for such a move is that everyone needs to be onboard….especially the board.
"Beyond budgeting enables better, more consistent levels of performance based on efficient processes and the collective endeavours of self-motivated and fulfilled people" -- Dr Steve Morlidge, thought leader and author
Realising the value of your finance human capital was another interesting topic. The need to continuously address skill gaps to equip FP&A teams with the right knowledge, ability, tools and training to execute their roles efficiently and raise core competencies across the function are crucial.
“I’ve learned that it’s really important to make sure you know how your budget process impacts the behavior or people in your organization,” said Jill Bowman, FP&A, a financial analyst who co-led a recent AFP webinar on making the budgeting process less painful and more productive. “You want to make sure that the process is designed to add value and optimize your resources and you don’t want incentivize unhealthy behaviors like hording or interdepartmental sabotage.
Appears the budget will be around, in one form or another, for some time to come.