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Do we need to balance the budget?



In changing times, previously unchallenged finance basics are under question. Credit professionals find themselves under increasing pressure to provide “value” to the overall business in which they operate. Some of these are as a result of finance finding regulatory and “compliance” tasks increasing in volume and staff costs under scrutiny.

A recent survey by Grant Thornton in the US established that 62% of finance executives saw this retrospective work as a barrier to more “valuable” work such as FP&A.

As some finance functions are drawn back into the traditional “reporting” focus, so executives from other functions question the overall contribution of finance and the value for money it represents. Historic reporting has the effect of reducing the visibility of finance with “operating” functions, and the interaction points between these become even more important where they exist.

Demonstrating value

One major traditional interaction has been the annual budgeting process, which brought together finance and operators in a long negotiation over figures, adjustments, and accountabilities. Both multiple iterations at detailed levels and alternative quick fire targeted uplift on revenues and proportionate savings on costs can leave the entire organisation exhausted, frustrated and (often) disengaged. In the same survey mentioned earlier, only 37% of CFOs rated their approach to budgeting as valuable. 

But is this merely a question of “how” this is done, or just as much a question of “what” and “why”?

Now is the time for us to review not only the methodologies which we use, but also to reevaluate the purpose of the process. It is no longer enough to introduce new methods without genuine consideration of the value to the overall organisation.

Breaking the habit

So, why have we traditionally tormented ourselves over budgets? The overall purpose is pretty clear – to assist in managing the business revenues and costs. But what lies underneath this? There are three key purposes:

  • to give management an annualised view on how the business will perform
  • to gather views from within the business on likely changes in the market in terms of sales, costs and operating conditions
  • to give senior and middle management targets (or standards) for performance management purposes.

In some ways the idea of an annual budget is destructive. Whilst most businesses have got beyond such a situation, a once a year process can encourage staff and management to only truly consider market forces and internal adjustments whilst this process is in train. As a result, significant knowledge may not be acted upon in a timely fashion.

Finally, anything termed a “budget” is generally associated with only one dimension of performance (namely numbers). The more widespread use of scorecards has made a significant difference to overall performance measurement, but in my experience the elements are rarely considered together in a cohesive fashion at budget time.

Challenging the norm

It is better to engage with the business on two main areas on an on-going basis: KPIs and a rolling forecast.

KPIs should be just that – key. All too often they are too disparate and inconsequential. Nonetheless they must also cover sufficient workings of the business to enable a holistic view. Simply put, changes to expectations in staff and customer segments must combine with financial to offer a series of meaningful targets.

Best practice suggests that business should be looking at a forward 12 month forecast at least every quarter. For many businesses this is linked to a Sales and Operational Planning process (S&OP), allowing both sales and operations to plan for the year (often two) ahead, taking into account the time factor between forecast and realisation. Even where this is not present, quarterly reviews of business sales and operational performance and projections will provide a rolling estimate of costs and profits. This brings in a business owned projection which can be used for planning purposes and challenged by senior management if it seems at odds with their ambition.

Combining KPI targets and rolling forecasts will allow finance to prepare a less painful, more accurate, better owned, cohesive and valuable “budget” to cover the required periods. Many FP&A functions are also finding their own ways through the complex budgeting process and developing new best practices, and we should continue to challenge our previous “norms”.

A final thought

Sticking to a traditional budget process and method may further accentuate a devalued opinion of finance, unintentionally drive a wedge between finance and other functions, and lead to a lack of ownership amongst those who have to “deliver” it. Reviewing the purpose of your particular budget process and seeking alternative ways to derive this, as well as focusing operating units on their own KPIs and forecasts, can assist to change the perception of finance as it reduces the perceived administrative burden and shows the ability of finance to work in closer partnership across the organisation.

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