There’s Still Time to Fix This Year’s Budget Process

There’s Still Time to Fix This Year’s Budget Process

04.18.13John Pancoast

There are good aspects of the forced march through the numbers

One memorable movie from the 1960s has crept back into my consciousness.  In the movie, two guys from California travel around the world for the better part of a year, surfing coastlines from Tahiti to South Africa, in search of the perfect wave. In August, they are in the Northern hemisphere; in December, south of the equator. It was their Endless Summer.

I am reminded of this movie nearly every year at this time when the budgeting process begins. No, not the federal budget… your budget. It begins sometime before the end of spring with strategic planning offsites or the release of assumptions, milestones and deadlines by the budgeting office. It doesn’t actually end until the finance folks put next year’s numbers into the accounting system in January or February of the following year. That’s often ten months. The Endless Budget!

There are good aspects of this forced march through the numbers. It requires leaders to think carefully about market opportunities and resource requirements, optimizing the two for the best possible outcome. Yet very few people I know think that their process works as well as it should. The economic assumptions don’t really drive revenue or expenses very directly. The business “actuals” they are based on are from six or nine months before the plan year. The budget ends up being the result of a series of time consuming, detail intensive, iterative cycles, resulting in something that stakeholders have a hard time recognizing at the end. In fact, since everybody expects that the budget won’t initially add up to something the executive team can support, we anticipate the multiple cycles of revision by under committing at the start and starting early enough to accommodate all those iterations. Both practical accommodations undermine the quality of the process. So how can we keep the good aspects of this process while we toss the rest?

I have occasionally had the pleasure of working with some organizations where the CFO has said, “Enough!” and together we have redesigned the process for greater value and simplicity. The menu of possible solutions is extensive – at one time or another, teams have chosen zero based budgets, rolling forecasts, activity based costing, flexible budgets, formal links to strategy, and better use of budgeting software. Each solution set has its advocates, but these usually are not on the critical path to budgeting success.

The one thing that breaks open the budgeting process and creates value for these organizations is a commitment at the executive level to set expectations at the beginning of the process and free people to build their budgets accordingly. By starting with the end in mind, managers do not need to prepare one highly detailed submission after another in the hope that it will all add up to an acceptable answer. When the executive team works through the strategic alternatives and makes decisions about the tough tradeoffs at the beginning of the process, managers can focus on producing a useful budget in a single cycle through the organization.

Obviously, there are challenges in making this shift. Executives sometimes hope that “seeing how much” the business units will offer may get them to a better overall result. Managers, by contrast, may want to back away from aggressive promises, since exceeding expectations can be beneficial to career and pocketbook. But planning for expense levels that are out of line with the true needs of the business is a poor way to build a plan. Executives and managers alike are often accustomed to the back and forth that defines the traditional process, have come to see it as a series of better and better approximations, and have learned to tolerate the resulting waste of resources. Getting out of this familiar pattern of negotiation requires everybody to shift their unproductive behavior for the good of the company.

Information is the second challenge. Executives need a certain amount of reliable information about trends in the market and in their business – the kind that often is captured in KPI’s or performance dashboards – to be comfortable setting targets on their own. Plans to redesign the process need to address this need.

Finally, executives need to trust their business leaders to build budgets based on operating models and assumptions that are capable of delivering the targets. Without this trust, it is hard for the executives to stay out of the budget minutiae, and hard for managers to feel empowered to produce a plan that has value as a management tool.

So, how does this alternative process look and feel?  It begins by informing leaders that there will be one budget submission this planning season, and by helping the executive team to understand their new responsibilities and role in the shift. It starts as late as possible in order to benefit from the best available information about the company’s markets and operations. And it requires that all stakeholders hear from the top of the organization that the submitted budgets will meet the goals agreed on by the executive team on the first pass.

The calendar for one company we worked with was cut from seven months to three even as the required effort was cut by 50%, and the predictive value of the budget was improved. This $1Billion company started the redesign work in mid-June and had a budget completed, using the new process, by October 1, the beginning of their next fiscal year. We found essentially the same set of benefits were possible with a $40 billion multinational.

Neither effort required big investments in people or processes or new systems. They were notable, by contrast, for the collaborative spirit of the executive teams who stepped out of their comfort zones and took on the responsibility of setting goals for the year ahead and holding managers to these expectations. Instead of The Endless Budget, they insisted on one good budget, and got a leaner, better process in the bargain.

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