Dynamic budgeting focuses companies on the future, not the past

Budgeting should be about managing the future performance of a company, not its history. By their very nature, company results fall into the realm of what is past, and have little real impact on future performance. Companies that are seeking to manage for performance - as opposed to results - will find that dynamic budgeting is becoming a key survival mechanism in today's fast-moving global economy. Greg Bogiages, director at business intelligence solutions specialist Cortell SA, looks at the advantages offered by this new budgeting approach.

Outcome evaluations should demand more time than budget mechanics. Far from locking companies into the past, budgets should focus them on current and future realities. The good news is that technology and budgeting techniques have advanced to the extent that organisations can truly focus more on results rather than processes. Dynamic budgeting takes the drudgery out of the budgeting process and concentrates the effort where it is required - on analysing outcomes and making alternative plans where necessary.

Traditional budgeting methods and systems, in which many months are spent pouring over figures and conducting endless budget review meetings only to yield outdated information, simply do not meet the requirements of business today, primarily because they do not reflect actual situations, and record only what has already happened. This type of budgeting does not enable planning or change, and will ultimately inhibit company survival as it ties managers to the past, depriving them of incentives to look for growth, and rendering the organisation inflexible.

More importantly, traditional budgeting - often an unfocused effort that takes place between disparate operational silos - can cost companies vast amounts of money because they cease to understand their costs, particularly in large organisations where they are spread across many different activities and cost centres. This has serious implications at a time when corporate governance and legislative requirements such as King II and Sarbanes-Oxley are placing additional pressure on companies to be transparent and to report accurately.

How do factors such as a variable exchange rates and a fluctuating raw material prices impact on the business? To have access to this type of critical information, you require reports in realtime that can immediately calculate changes in currency and costs. Without this information, people end up making decisions in a vacuum. They cannot do "what if" projections and obtain immediate results, which means they are always functioning reactively rather than taking a proactive approach to the business.

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* The budgeting process taking from three to six months to complete;
* Making changes to budgets often requires a rebuilding of the whole budget and may take days or sometimes weeks to complete;
* Minimal scenario analysis or sensitivity testing being done due to the long processing cycle involved; and
* Excessive use of spreadsheets requires (expensive) people checking budget integrity and validity.

Reactive budgeting results in unclear objectives, and renders the organisation incapable of reacting to change. Budgeting should emphasise the "thinking" process in the business, enabling people to evaluate alternatives and understand risks. Yet most effort is expended on budget mechanics or the logistical process of putting it together. With good planning, careful thought and the right technology, this need not be so.

Online analytical processing (OLAP), a database technology that allows users to view and understand large sets of complex data. It allows data to be viewed across multiple dimensions by analysts, managers and executives and gives them the option to drill from summary data sets into the specific data underlying the summaries, thereby offering several advantages to organisations by:

* Minimising inputs;
* Allowing multiple scenarios to be evaluated;
* Providing instantaneous representations of results;
* Allowing drill-downs or the ability to slice-and-dice information the way it is required;
* Providing "structural" flexibility to allow for the introduction of new products, departments and processes;
* Being parameterised to allow instantaneous updates of issues, such as foreign exchange rates, interest rates and growth rates;
* Allowing bottom-up data capture;
* Allowing top-down revisions;
* Enabling the locking of revisions or "approved" budgets;
* Allowing the process to be continuous in the form of a rolling budget.

Budgeting can be made much simpler and flexible by using multi-dimensional database structures. In addition, different budget components can be linked together to form an integrated and flexible budgeting system. This allows updates to sales, resulting in dynamic recalculation of cash flows, balance sheets and instantaneously updated reports and views in cubes. Last-minute cuts to the budget (such as manpower) can be made with minimal effort.

Budgeting should be a planning process, a time for thinking about the future, about making alternative plans and visualising the results. With dynamic budgeting, this becomes a reality.

The time and effort that can be saved by streamlining this process enables the finance department to address more critical business issues, and to play a far more significant role in business planning and strategy - as opposed to merely being involved in the mechanical process of putting the parts together.

Dynamic budgeting provides a way of managing budgets in realtime, each month, using exceptional forecasting and organisational techniques. It also enables a whole new level of revenue forecasting processes, giving companies visibility into revenue trends months ahead, allowing them to work on revenue weaknesses, pricing strategies and cost planning. With accurate operational forecasts, companies can project their quarterly results as the quarter begins, enabling them to maintain profitability. Finally, dynamic budgeting does away with the over-inflated budgets that lead to missed earnings numbers, negative cash flow and unhappy investors.