How shorter budget cycles lead to business success
The budget is the single most important management tool most businesses have. But when the budgeting process drags out, it can become a painful waste of time. Here’s the case for creating a tight, focused budget process that takes no more than three to four weeks.
There are two performance measures readily available to most businesses – comparison of actual figures to last year’s, or to the budget. Unfortunately last year’s figures are historical and don’t include any strategic changes to the business, good or bad. By contrast, budgets let you build on history, taking into account strategic changes in delivery, and including best estimates for the future against which to measure performance.
For the non-financial manager, it’s the only measurement tool available. Raw numbers on their own can be interpreted any way you like; it’s only in the context of the budget that they acquire real meaning. Depending on what your budget requires, a 10 percent increase in sales can be either an awesome success — or an abject failure.
Ideally, the process of budget planning for the next financial year should give everyone in the organisation an opportunity to reflect on what they’ve achieved, what the external environment is telling them and where they want to go next. In times of recession, do we aim to increase revenues or simply maintain them? Which market segments are we going to target most aggressively? Where are the most profitable places to invest in new capacity, and where do we hold back? These are key strategic questions that should receive focused attention by everyone in the business.
Sadly, hardly anybody reaps the full rewards of focused engagement with the budget process. Too often businesses are facing the future with budgets that are grudgingly thrown together by cost centre managers with other things on their mind. They might as well be driving down the highway blindfolded.
The problem is not that organisations are spending too little time on their budgets. Quite the opposite, in fact: they’re spending too much.
A tight, focused budget process should take no more than three to four weeks, start to finish. That’s just a month (and it can be done in a lot less time). Most businesses are taking between two and four months.
The reason budgeting is such a drawn-out procedure is that most organisations are using slow, cumbersome spreadsheet-based processes. That means a lot of hours spent designing budget templates, emailing out spreadsheets, nagging cost centre managers to fill them in and send them back and then laboriously compiling the (often incompatible) results, only to have to do it all over again when somebody mails in a radically revised version ten minutes before the deadline. It’s not a smooth ride.
When the budget process drags out that long, it becomes a painful waste of time. People start avoiding it, everybody loses focus and the benefits are lost. Instead of budgeting for the business, people end up in the business of budgeting — and that, oddly enough, doesn’t produce revenue.
The problem is bigger than just loss of strategic focus. There are hard costs involved as well. How much money does your organisation spend on its finance team each month? And for how many months of the year is that team tied up doing work for which it is frighteningly overqualified? Because make no mistake, it doesn’t take a certified accountant (CA) to call around the company’s cost centre managers asking them to please submit their budget spreadsheets. If that’s what your CAs are doing, you’re not doing yourself — or them — any favours.
Add the hourly cost of your finance team to the cost of your business managers, multiply that by the number of hours everyone spends working on budgets and you’re likely to be staggered by the actual cost.
Then there’s the opportunity cost of all those hours. For a sales manager, every hour spent on a budget spreadsheet is an hour lost to making sales. Quite understandably, most sales managers put budget planning at the bottom of their inbox and resolutely ignore it until the nagging becomes insistent. After all, the numbers seem remote to them: the budget is an exercise they do once a year because the finance guys insist on it, but their daily work is guided by a different set of drivers altogether.
Centralised fill-in-the-blanks budget processes also create massive accountability problems. If the budget is owned by the finance department, then most people will assume it’s their job to look after it. The problem is that the people who spend the money — in production and logistics and marketing and everywhere else — are then not the people who feel responsible for the money, and that is a recipe for trouble.
If a business wants all its managers — indeed, all its employees — to buy into their responsibility for making sure that the business is profitable, it should empower those people with the tools and the knowledge to participate in setting their own targets, and their own budgets. That means more than just plugging last year’s numbers plus 10 percent in to a spreadsheet – it means engaging actively with all the strategic questions we asked at the beginning of this article.
This engagement should not, of course, stop with the budget, which happens only once year. Every manager of every cost centre should be constantly checking their progress and updating their budget, or more correctly, reforecasting. But if the budget alone takes four months, your chances of getting mangers to spend even more time doing forecasts are slim.
It’s not just managers who should be paying more attention, either. The more end users know about the company’s financial situation, the more they can take ownership and responsibility for it. But when forecasts are made and targets set centrally — by finance departments who may have little or no knowledge of what’s actually happening at the coalface — buy-in evaporates. The knowledge of the end user is priceless, and your business should be able to tap into this through its budgeting and forecasting process.
The question of ownership and accountability is even more important when it comes to explaining budget variances. Asking the finance department to explain why sales didn’t make its targets, or production overspent, is pointless. Again, it’s the people doing the work who are best placed to answer the questions.
Budgeting, forecasting and monitoring targets should be everyone’s business. But as long as it’s a centralised process that needs the finance team to spend weeks chasing, consolidating and aggregating spreadsheets, it will stay their business alone.
Fortunately, the tools you can use to shorten the budget process are the same tools you can use to make it easier, more engaging and more meaningful to everyone, while at the same increasing accuracy and ownership of the numbers.
Web-based or server-based budgeting and forecasting tools provide each manager with a custom window into their own section of the overall budget. Once a change is made, it’s made — no more painstaking compilation from multiple, often incompatible spreadsheets.
When there’s only one central data store, rather than an aimless flock of spreadsheets wafting through the organisation, budget tracking suddenly becomes much easier. Link the budgeting software to the underlying financial system, and suddenly cost centre managers can track their spend and revenue against targets, pretty much in real time. That means more involvement, more empowerment and more ownership of the numbers.
Liberation from the budget spreadsheet is good for members of the finance team, too. When the process is faster and less cumbersome, accountants can turn their time and attention to things they were actually trained for: analysing, investigating, evaluating and identifying trends. It’s impossible to take this kind of high-level view when you’re spending your time phoning around begging and wrestling with spreadsheets.
When there’s time and space to take the helicopter view, things become clear that might get lost in the rush otherwise. Let’s say half your cost centres start budgeting for lower sales — that’s an important thing to know, but it’s exactly the kind of insight that gets lost when people only have time to focus on the numbers in front of them right now.
It’s not exaggerating to say that probably the majority of accountants in Australia have just this problem: too much time spent among the trees, not enough space to see the forest. Cutting down on meaningless, unfulfilling, unproductive work by tossing out spreadsheets could be good for everyone.
If you’d like to get practical, email me Charles.Pludthura@sage.com