There can hardly be an organisation that does not understand the importance of budgeting and planning - or any executive who enjoys these closely interlinked processes.
Almost all executives view budgeting and planning as a process that adds little value, consumes far too much in the way of resources, doesn`t necessarily add value or align with business goals, cannot be relied on, takes too long to develop, is out of synch with actual corporate performance, doesn`t integrate easily with the rest of the business, isn`t referred to regularly, and is difficult to modify once developed.
It is for all of the above reasons that the corporate budgeting and planning process is the second area where most organisations focus their attention - the first being financial consolidation, as noted in my previous Industry Insight, when looking at enterprise performance management; it`s the next, logical area where there is the greatest pain, and once this is resolved, where the greatest gains are to be had.
Let`s look closely at each of the issues noted above:
* A process that adds little value: In essence, planning and budgeting should drive the way the organisation sets its medium-term strategy, sets goals, assigns targets and identifies the associated costs, with predicted profit as a consequence. But all too often, these figures are arbitrary assumptions based on historic performance, rather than clearly reasoned targets set on the way the organisation is constituted, and appropriately aligned with the company`s ability to deliver.
* Consumes far too much in the way of resources: Executives and managers who should be spending their time running the business end up instead taking three months or more to perform planning and set budgets. And once these plans and budgets have been drawn up, they need to be ratified and integrated, a process which is laborious and time-consuming, leads to much rekeying of work already done, and potential for error, while adding no value to the business.
* Doesn`t necessarily add value or align with business goals: Planning and budgeting is typically far too concerned with mundane, repetitious activities, conducted year in, year out and not enhancing the business. If anything, they detract from the business in sapping its energy, and they do not advance or fulfil corporate strategy.
* Cannot be relied on: Planning and budgets are typically done on spreadsheets, with various managers running in isolation. Reconciling them and rolling them all up into a master plan and budget is a time-consuming, nightmarish activity, typically fraught with error, which means the final product cannot be accepted. And the process adds no value to the business.
* Takes too long to develop: Any corporate process that takes three months is simply too lengthy and ponderous, especially when because of the time it takes, there is no time to test assumptions thoroughly, or consider alternative what-if scenarios.
Given the awkwardness of developing the budget in the first place, it is a monster to change, so many organisations don`t even try.
Adrian van der Merwe is MD of 8th Man Consulting.
* Is out of synch with actual corporate performance: Planning and budgeting should predict and presage the actual performance of the organisation, and views and insights into this performance should then inform the planning and budgeting cycle, which should be live and iterative. Typically, though, planning and budgeting, performed 12 months earlier, do not reflect the way the business will perform. This is one reason why very often forecasts are out of kilter with actual performance, which can disappoint the market. It also explains why plans and budgets set for medium- to long-term projects are seldom an accurate reflection of what happens - think of the Gautrain and 2010 World Cup.
* Doesn`t integrate easily with the rest of the business: Planning and budgeting are typically conducted as silos of activity, being conducted on standalone spreadsheets. Rolling this activity into the organisation`s actual performance takes significant manual work.
* Isn`t referred to regularly: It is part of the corporate world that plans and budgets are dumped in a drawer and seldom looked at again. Given that many ignore or pay lip service to them, it begs the question of why they are done in the first place.
* Is difficult to modify once developed: Given the awkwardness of developing the budget in the first place - a function to an extent of the number of stakeholders whose interests must be considered - it is a monster to change, so many organisations don`t even try. But as time rolls by, so the planning and budgeting process must be modified.
These shortcomings were among the prime reasons enterprise performance management (EPM) was developed as a corporate discipline. In many ways, planning and budgeting inform the entire EPM cycle; they are the starting point of the cycle, and should be the initiator of key performance indicators.
With EPM, planning and budgeting is a centrally managed, yet fully decentralised activity. It runs against a single, business intelligence-informed view of the truth. It is accessed via the Web or Excel, making its adoption easy. It operates at speed of thought, making it easy to run what-if scenarios and test assumptions. Given these factors, it also takes far less time and effort to roll up departmental budgets and planning exercises.
These can also be used to inform other EPM activities, and in turn be informed by them.
Best of all, they can be embedded in workflow processes, ensuring there can be no bypassing or ignoring of the budget.
Go with the EPM planning and budget method, or continue to struggle with this key business process!
* Adrian van der Merwe is MD of 8th Man Consulting.
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