Nobody, with the possible exception of accountants, likes budgeting. It`s time-consuming, complex and has no direct impact on sales, revenues or profits. David McWilliam, MD of Cognos SA, believes it`s time to shelve the old-style budgeting process and replace it with an efficient, integrated business process designed to improve the company`s performance.
Which management board would be dumb enough to hire an executive openly admitting that he would be spending four months of each year engaged in activities that have absolutely no bearing on the company, its strategy, direction, performance and results?
Unfortunately, the correct answer is each and every board in the world. Four months is the average management time consumed by budgeting every year. Has anyone calculated the costs involved in actually producing the annual budget? How about the costs of lost opportunities because management was too busy bean counting, using last year`s data, to make good decisions to benefit performance this year? In a rapidly changing world ruled by a tight economy, how can last year`s data be of value in determining this year`s strategy? Budgets have the inexplicable habit of deciding how much will be spent where for the next 12 months, without taking the real state of the nation into account at particular points in the year.
If a business selling widgets posted a 5% growth last year, the budget for the coming year would incorporate inflation and current market intelligence (one hopes) to plan for the coming year. If a recession strikes or widgets become a fad midyear, the budget has not left space to manoeuvre and the business could lose out by not taking advantage of environmental conditions. That does not strike me as good business. A budget is out of date even before it comes into effect; it is almost a curiosity by year-end.
A working budget
To have an effective budgeting process requires accurate, current data and intelligence delivered and integrated into the mix on an ongoing basis.
What this means is that companies should be designing rolling budgets that can adapt to the realities of the business and economic environment in real time. The budget then becomes part of an overall corporate performance management (CPM) architecture in which data from all parts of the business is gathered and processed in real or near-real time, providing a constant up-to-date view of the business`s performance.
The CPM process provides executives with a single global view of their organisation`s performance, consolidating multiple diverse ledgers with thousands of operating units and accounts into one common chart-of-accounts structure. It also allows these decision-makers to accurately allocate funds or other assistance to areas of the business in need, based on the real situation and not some circumstances that happened a year ago.
The process of consolidating financials into a single view also takes much of the lengthy drudgework out of the budgeting process and enables management to spend their budget time planning and updating their strategies based on what`s happening in the market. Instead of unproductive quantity, the budget now demands quality time from executives.
In addition, departmental or divisional managers will also be able to have a single view of their areas of influence, empowering them to make informed and ultimately effective decisions.
Pay for performance
Another bottom line benefit rolling budgets deliver is a real measure of each department and manager`s performance. Traditional budgeting allocates bonuses and raises for meeting targets set according to last year`s income and expenditure.
Accurate real-time information allows management to see exactly what is happening and allocate additional spend or cut spending accordingly. A manager will therefore not simply have to ensure that the allocated budget is used up come year-end, but can be incentivised according to the amount saved or the increase in revenue better intelligence allows him/her to deliver.
This type of measurement and incentivisation is not very popular, as managers and executives suddenly find themselves exposed in a transparent organisation. Actions can be judged according to their effectiveness - reflecting directly on management`s competence.
The days of the Dilbert manager are fast drawing to a close. Effective budgeting as part of a CPM process will ensure that middle management is no longer a safe, anonymous place to hide. We will all be judged on our level of competence in future as enterprises are more easily able to judge who and what processes are effective, allowing the company to say goodbye to the weakest management links.
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