An uninformed budget can derail strategy, agility

Organisations that do not have visibility into their business performance are at a distinct disadvantage. Today, business is fast-paced and a financial report or budget - the traditional driver of business decision-making - is insufficient to provide an accurate reflection of a business` well-being or gauge the successful execution of a strategy. The inability to provide timeous access to accurate information from numerous sources derails this business barometer.

To guide business decisions, strategy and budget creation, inputs are often required from a number of divisions, lines of business, competencies (such as HR and marketing) and outside sources. Unfortunately, many businesses have rigid or legacy systems that hinder the delivery of, or access to, information. This encumbers visibility, accountability and predictability, making the process of budgeting a protracted and time-consuming task. This is further exacerbated by market changes and influences that require that financials be a continuously adjusted to ensure ongoing competitiveness.

Explains David McWilliam, managing director of Cognos SA: "Budgeting processes are generally initiated months before a company`s financial year-end. Due to the dynamic nature of economic and financial markets, however, the budget is often outdated by the time it is completed and ready to be implemented."

The importance of budgeting cannot be overemphasised as it usually contains within it the short- and long-term strategy of the business. "However," notes McWilliam, "when the budget is changed as part of a delayed reaction to internal or external market shifts it can become the `Achilles heel` of a company, causing it to lose competitive advantage."

A lack of accountability is one of the issues faced by companies that make use of old fashioned budgeting methods that do not access real-time, meaningful information that allows them to link strategy to execution.

Notes McWilliam: "In a bottom up approach, operational entities such as marketing and human resources participate in the budgeting procedure, yet executives are unable to view the budget until it is completed. Discrepancies - the result of using cumbersome, inaccurate spreadsheets that offer no audit control - are reverted back to operations. The budget may thus be reworked a number of times and be outdated by the time it is implemented.

"The alternative is a top-down approach where executive management make budget decisions without input from operations. The danger here is that accountability then becomes blurred as no real responsibility will be accepted by operational staff members that have not bought into the changes."

Another common mistake is to compile departmental budgets in isolation with no view of the overall business strategy. It is critical that corporate objectives be aligned with operations and plans. A suitable performance management (PM) solution can assist. Components of it allows for an effective budget that links strategy to execution and shortens budgeting times by integrating real-time information from various sources. This allows businesses to respond to current rather than historical data, accurately adjusting budgets that enable holistically integrated forward-looking strategies.

Market influences or changes, such as currency fluctuations, will influence business direction. To respond agilely, organisations need to be able to dynamically link these changes to operational plans. It is imperative to view different scenarios at the click of a button. For example, a decrease in the exchange rate of the local currency might be disadvantageous to a company that exports locally manufactured products. A PM solution that incorporates `what if` scenario reporting will indicate almost instantly the increased `throughput` required to reach the same profit margins.

Putting a relevant budget together is thus dependant on obtaining a holistic view of the organisation. To create this view and execute according to the company`s overall goals and strategy, a tight and seamlessly integrated (information and budget planning) system is required. This drives accountability, improved accuracy and visibility.

Without a PM solution in place, the office of finance would send out a budget `template` to individual departments, with each cost centre independently capturing information and returning it to the financial department. Saddled with a collection of spreadsheets, the financial department is charged with preparing a budget without cross-divisional integration of this information. This hinders `visibility` as the overall health of the company is difficult to establish.

In this scenario, the root of a problematic area within the business is often not identified quickly enough, slowing reaction time and limiting the company`s ability to rectify the problem before it becomes a crisis. Dynamic updates are essential to reflect an accurate state of business, also providing the basis for measuring the impact of cost centre changes across the enterprise in response to market shifts.

KAP International Holdings Limited, a holding company comprising subsidiaries and associate companies in diverse manufacturing businesses, experienced these same frustrations. John Haverman, group financial controller at KAP, explains: "We relied on spreadsheet information to complete our monthly group financial consolidation and results reporting. This method proved clumsy. The spreadsheets could not handle the increasing volumes of data, nor were they geared to handle the underlying logic. Due to the complexity of calculations, there were numerous inaccuracies. Further exacerbating the problem, the changes submitted by various divisions and departments were difficult to track."

The company resolved the problem by implementing a component of a PM solution supplied and implemented by FIOS a company that concentrates on the deployment and support of financial performance management (FPM) systems in both the public and private sector. "What initially took two or three days to complete is now done in approximately four hours," says Haverman. "In addition, information that would previously take half a day to extract, such as a breakdown of debtors by time and company, can now be done with the click of a button. Speedy access to information also allows KAP to monitor trends and respond in a more timeous manner."

The company is looking forward to using the solution for its 2006 budgets. "Budgeting is regarded as a lengthy, laborious exercise. This time round we anticipate a faster, easier and more efficient budgeting process. Our solution is Web-enabled and changes will be done online, providing us with a real-time view."

Businesses that align their planning cycle with dynamic market conditions have the ability to respond quickly to fluctuations. A wage strike, for example, requires quick decision-making and is only achieved if the impact of the required increase across the entire organisation - its strategies and operations - can be viewed. A delay to react and make informed decisions, as seen with the recent Pick `n Pay strike, can cost a company millions of rands.

Says Johan van Jaarsveld, MD of Cognos partner, FIOS: "The ability to shorten the planning and decision-making cycle provides businesses with a distinct advantage. Competitive advantage relies on speed as much as access to valuable information. A competitor armed with important market information and the ability to assess its worth in terms of delivering predictable, visible business performance returns will react quickly, gaining a marked advantage over rivals."

This is particularly relevant to listed companies. Over- or under-performance are perceived by shareholders to indicate a lack of understanding of the market and/or control over the business. This impacts the share price and can influence potential investors negatively. On-target performance is thus highly desirable.

Concludes McWilliams: "A PM solution is a worthy investment in your company`s success and will assist to stay ahead of the pack. The strategy should underpin and inform a company`s approach to the budget. If an organisation responds too slowly to dynamic influences, however, the budgeting process will be ineffectual. A PM solution delivers not only the needed information and intelligence, but enables business agility and increased performance."