Insider Business Club: budgets

Should  companies scrap budgets in favour of forecasts?

Greg Dimmock, product marketing director, Cartesis

While I think the end goal of replacing budgets with rolling forecasts, or
with continuous updates and business reviews, is actually a good one, a number
of companies are not ready to take that step.

The reality is, most companies are still budgeting with spreadsheets. So the
fact that they’re still in the stone age, so to speak, really would make the
distance to that end goal of rolling forecasts very far. So we’re about taking
pragmatic steps towards a better budgeting process.

If a better budgeting process for an individual company means eliminating a
budget, or what have you, then that’s fine as long as the company can keep the
controls in place to be able to do that.

I think everyone would agree that budgeting down to the office expense
supplies is an exercise in futility, and all it does is create more data that
you have to reconcile within your budgeting and analytics process.

Getting the right level of detail is key. In some business units, companies
were actually pleased with a system that let them plan with more granularity
along, for example, their product line.

They were able to better understand their business in terms of their
products. And since they had previously been restricted to a finance view of the
world, and were thinking about things in terms of a profit and loss rather than
a balance sheet, they really couldn’t marry what their budgets were saying with
the programmes or initiatives they had introduced to generate more business.

So, in that case, they actually did end up with a little bit more detail, but
overall, I do think data simplification is an obvious way to reduce the burden
in the budgeting process.

Is budgeting still relevant?

Trevor Trueman, director of business transformation, Hackett
Group

I’ve been involved in budgeting for many years, previously as a finance
director, then in management consulting.

Budgeting really is very old. It was over 100 years ago when we started
budgeting, and even as late as the 1970s it was still totally relevant. But in
today’s world, I think it has had its day, and I think there is a need to
re-engineer the whole process of budgeting.

I have a strong view that our budgets are out of date as soon as we implement
them, and so we have to move with the times and move with the latest information
we have to give ourselves a more meaningful set of figures.

There’s no point in reporting against a budget that is out of date. There is
very little value in doing variance analysis from a budget if everything has
changed in the business over the past couple of months.

We aren’t in the simple age as we were in the 1970s, where businesses were
mainly manufacturing. We’re now in the technology age ­ the knowledge age ­
where we have much more complex systems and our budgets haven’t moved with the
times in that regard. So we have had to change.

We can’t change overnight. There have to be steps we take that enable us to
get from A to B in a very pragmatic way, but without throwing things out the
window.
Some businesses have done that though, where there has been a big bang and
they’ve stopped budgeting and have moved into the rolling forecasts. But it
takes a very lean organisation to enable that to happen. We need to move away
from the command and control we’ve been accustomed to, and into a much more
devolved leadership type of organisation.

What are the alternatives to traditional budgeting?

Matthew Leitch, consultant, researcher and author, Internal Controls
Design

Some companies find that statistical extrapolation works really well for them:
that is, simple calculations giving forecasts that are more accurate and easier
to understand than asking lots of budget holders to give some numbers and have
them all added up.

In a situation such as that, you’re getting better accuracy and spending
almost no time at all on forecasting.

One of the things you need to do when looking at statistical extrapolation as
part or as a replacement for adding up peoples’ guestimates is the statistics.
Not everyone feels comfortable with maths. It’s more than just accountancy, but
it’s not terribly difficult. Tools today are fantastic for doing this kind of
work.

When we become aware that our forecasts haven’t been as accurate as we would
have liked, our instinctive reaction is to involve more people and go into more
detail.

I did some work with the United Kingdom Accreditation Service this year which
had been through exactly this cycle. But they were thinking it was possible
that, with better statistics, they might find they could do better forecasting
with a lot less effort.

That had been suggested by one of their non executive directors and it proved
to be the case. They realised through carefully testing their past forecasts
against statistical extrapolation that, in fact, they could have made more
accurate forecasts with almost no effort and a lot less detail.

As you say, it is just natural to think that if you go into more detail,
reconcile more carefully, get more people involved and use more information,
you’ll get better forecasts. That is simply not true ­ not in all cases, at
least.

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