Effective enterprise-wide budgeting can be a painful annual task that is often inefficient and costly. In a 1995 benchmarking exercise, Price Waterhouse (as it was called at the time) found that budget preparation took an average of 110 days, and reported that profit forecasts varied from actual results by a median of 10%.
In today’s world, being tied to an old-style, 12-month budgeting cycle will make a company uncompetitive. Annual plans are outdated because product lifecycles are short and market conditions change rapidly. Ericsson, IKEA, Boots and Volvo have already revised their need for annual budgets.
As an alternative, many companies use other management techniques, including rolling forecasts. These new techniques often replace the traditional annual budget with three-month forecasts and monthly reports to the board, including financial information and key performance indicators.
These can be supplemented with strategic long-term plans that can be used to look forward from four to ten years. Rolling budgets result in more up-to-date and proactive resource allocation.
Recent research carried out by Hyperion Solutions showed that 42% of respondents felt the budgeting process they employ is inefficient and time-consuming. The research also showed that more than half the time finance departments spend on budgets is in putting them together, with only 27% of the time spent on analysis and value-added work – those areas that deliver greater benefits.
Companies need to connect the operational plan with strategic planning, enterprise performance management and other ‘new’ techniques, such as planning using activity-based management and the balanced business scorecard.
However, the traditional annual budget is often seen as dead because the operational plan is so difficult to implement.
Managers cannot be expected to take on board new processes and techniques without easing the processes they must carry out now. To continuously re-forecast on a rolling 12 or 24-month basis would be the ideal scenario, but is impossible with complicated spreadsheets, non-process-orientated tools and managers who see little value in the process. This rolling operational plan must also tie in with the overall company targets and strategies.
To get the buy-in on new techniques, it is necessary to free up the resources of financial managers to allow the 80:20 mechanics:analysis ratio to be reversed. As all departments become aware of the benefits of the new process and are empowered by their involvement, true strategic management can take place.
The sooner the old budget is killed off, the better.
Tony Speakman is marketing director of Hyperion Solutions.
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