Beyond budgeting

15th November 2010

Lesley Meall, FSN contributing editor re-visits the traditional budget process and what has changed over the last couple of years in terms of approach and solutions.

When a London cabbie starts lecturing you on the difference between cyclical deficits and structural deficits, it seems as if the world has shifted on its axis and life will never be the same again; the reality is more mundane. The global financial crisis has made small talk about budget deficits as commonplace as chit chat on sports and the weather, but “talk is cheap”, as the taxi driver so eloquently puts it, and “cutting your coat according to your cloth” and “counting your chickens before they’re hatched” remain easier said than done.

There are many reasons for this, not least the traditional budgeting processes. “The annual budget is an artifact rooted in managing feudal governments in agrarian societies,” declares Robert Kugel, analyst and research director for financial performance management at Ventana Research, and although many organisations are putting aside some of the assumptions that are usually associated with this (such as ever-increasing expenses) and ramping up the frequency of budgeting revisions and forecasts, the latter can prove problematic for the many more that are using inadequate, ineffective and inappropriate software and systems. 

“Spreadsheets can be a bad thing in any scenario where you are interested in accuracy, control or auditability,” says Kugel, but (along with manual paper-based processes) they are still one of the most common ways for companies to manage budgeting, despite also being one of the most unwieldy, unresponsive, time-consuming and error-prone approaches. “Longstanding users believe that spending hours on the workarounds in their spreadsheets is a measure of their productivity, but they are kidding themselves,” he says, “and most companies spend way too much time budgeting and not enough time planning.”

 To some extent, this is a result of the constraints that have accompanied the traditional budgeting process for way too long, but in today’s complex and increasingly unpredictable world, it’s important to get the balance right. “Some companies confuse budgeting and planning,” says Kugel. “Budgeting is about control, and planning is about being successful, ” he clarifies. “Budgeting is about creating a statement of the financial administration based on estimates of expenditures and proposals for financing them. Planning is about creating a detailed program of action based on an overall objective.” 

Fortunately, the tools to make budgeting and planning more efficient are increasingly accessible – even for those determined to retain the much-maligned spreadsheet as part of the process. As FSN has previously highlighted, the collaborative nature of cloud-based applications such as Microsoft Office 2010, Google Apps and various other online productivity tools can make collaborative processes such as budgeting much easier to manage, by removing the need to distribute data via email, and eliminating the confusion and complexity that can be created by version management during the collection and consolidation phases.

 The cost of accessing these types of tools will vary depending on a number of factors, ranging from the software you already using (and how committed you are to it), to how large your organisation is, but for many small organisations, no investment will be required. Access to Google Apps (which includes Google Docs), for example, is free (to those with a browser and internet access), and allows up to 50 authorised users per organisation to share documents, presentations and spreadsheets online; while those who favour Microsoft can also be similarly blessed  if they sign up for Windows Live and use SkyDrive, as covered in an earlier FSN article

The next level up is purpose-built budgeting software. It was once the preserve of the very large and those with very deep pockets, but cloud-based offerings are making these specialist systems more widely accessible and affordable.  SaaS pure-plays Host Analytics and Adaptive Planning now provide on-demand access to budgeting software, as part of their broader ‘business performance management’ offerings, and FSN managing editor Gary Simon recently looked at their growing popularity and what differentiates them. It is worth noting, that the Express Edition of Adaptive Planning is available free for small companies and teams, with up to 50 users. 

On demand and on-premise ‘performance management’ tools have a great deal in common. They all offer varying levels of service, feature sets and capabilities, and the emphasis is on budgeting as part of a cycle that also encompasses forecasting and reporting. This makes it much easier for organisations to go beyond the data collection, control and collation that typifies many budgeting exercises, to really understand how the business is running, to collaborate ‘on the fly’, and to prepare for expected and unexpected changes in the organisation, the marketplace, and increasingly, the wider economy. 

This is because these systems facilitate complex and extensive scenario planning. “You can’t predict the future, but you can prepare for it,” says Steve Player, founder of The Player Group consultancy and program director of the Beyond Budgeting Roundtable, by understanding the various possible futures. “During the recession there was a sharp increase in interest in how to apply scenario planning,” he says, as organisations repeatedly discovered their budgets dead in the water. The downturn has emphasised the need to prepare for a wide range of possible futures – and not just the traditional three.

The volatility of the past few years has even prompted some organisations to reassess their need for budgeting at all. “The global financial meltdown forced a significant number of management teams to run their companies without budgets,” reports Player. “So more and more companies are adopting rolling forecasts,” and moving away from thousands of individual line items to focus on a reduced set of high-level details – something that Player and the Beyond Budgeting Roundtable have long advocated. “It makes a lot of sense,” he says, “because one of the biggest problems with traditional budgets is the amount of detail organisations try to jam into them.”

According to Nick O’Reilly, director at FRP Advisory LLP, the specialist restructuring, recovery and insolvency firm, there are other problems too, and these occur before, during and after the budgeting process. “Often a long debate is undertaken over projected turnover levels, but assumptions regarding margins are equally important,” he says, “as there can be a tendency for businesses to predict forward using current margins, without considering how realistic they are in the current environment,” which isn’t getting any easier to trade in, particularly for small and medium businesses.

“There is anecdotal evidence that larger businesses are starting to squeeze their suppliers for a second time, realising that the first round of negotiations didn’t go far enough,” reports O’Reilly, so its important to budget and plan, for and during 2010 and 2011, only after undertaking “a robust review” of the likelihood that existing contractual relationships will be maintained going forward, and ensuring that this is reflected in your scenario planning; which, for many UK organisations, should also reflect the potential impact of public sector cuts – which brings is neatly back to the cab driver and his talk of cyclical deficits and structural deficits.

“A large number of businesses will be directly or indirectly affected,” observes O’Reilly, so those who have not yet abandoned the budget should “think through carefully, and fully understand, potential changes in their future trading and cash flow,” due to the negative impacts on their extended chain of customers and suppliers. He also emphasises the need to link budgeting and planning. “It is vital that the ongoing monitoring of projections is agreed at the budgeting stage,” he says. “There are still way too many businesses that produce projections but then do not monitor them sufficiently throughout the year.”

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