Let's take each of these themes in turn and expand on these proposed improvements.
The thrust of this theme is to get finance staff out into the organisation giving support, guidance and advice to cost centre managers.
By understanding better how the business operates, finance staff will be better able to analyse and explain the financial implications of business plans and to identify the key drivers of costs.
Through advising and guiding cost centre managers on how to prepare the budget, finance staff can ensure consistency of approach without removing from the cost centre manager the responsibility for budget preparation and the ownership of the outcome.
Managers must not be afraid to be critical of their own performance.
Some people talk of targets, punishments and rewards. For others the tone is softer, suggesting a need for guidance, advice and training.
Getting budget holders engaged will be no mean feat. A key way of doing so is to get away from budgets that are based on last year's numbers, and that take no account of strategy and of plans to change. It will help if the Board itself doesn't just look at the numbers and, if reviewing performance against budget, that it isn't just a numbers game either. In other words, pursuing the other main improvement themes will help.
Few managers have budgets that roll forward on a monthly basis. (By rolling forward, we mean that the end date of the period covered by the budget keeps advancing with time, so that the budget's span remains constant). But quite a few see the introduction of rolling forecasts as a key improvement.
Why is the proposal to introduce rolling forecasts, as opposed to simply reforecasting, so popular?
Reasons aren't difficult to find. In conventional budgeting, the budget year is divided into 12 months each with its own figures for costs, revenues and non-financial measures. As the months go by, the forward visibility of what the organisation is attempting to achieve shrinks to nothing.
Towards the end of the budget year, two generally unhelpful consequences of this approach arise. One is that the
detailed planning of things whose lead time extends beyond the end of the budget year, for example recruitment or
ordering raw material, becomes difficult because detailed plans for the next budget year haven't yet been approved.
The other is that people delay important expenditure or pre-book revenue simply to improve the look of the outturn figures
for the year - the
accruals effect as one manager puts it - upsetting both customers and suppliers. Rolling
forecasts can ameliorate both these adverse effects.
For others, the major attraction of a rolling forecast is that it reduces dramatically the effort otherwise required for the preparation and acceptance of the annual budget.
The other factor sitting behind many of the proposals associated with this theme is that managers are not involved in the reforecasting process. In many organisations, it seems that reforecasting is done principally by the Finance department at a high level, and reported to the Board. Clearly, under these circumstances, reforecasts will suffer from the lack of involvement of managers and remove their responsibility for subsequent performance.
All of this adds pressure for the budget to be much more of a continuous process, intimately involving line managers. After all, management is a continuous process, and so too should be the budget.
Criticisms of the performance of the top team with regard to the budget verge on visceral. There is a widespread feeling that boards are too concerned with querying the detailed financial numbers instead of getting the overall strategy right and then making sure that the budget aligns with the strategic direction.
Managers make clear that greater involvement and communication is needed from the board/senior management, both in the early stages before budgets are put together and later when budgets are being reviewed. This reflects the view that the finance function and cost centre managers lack understanding of the top team's thinking.
Boards are criticised for reviewing draft budgets from the narrow perspective of costs and for being too easily swayed by pet projects. They do not check sufficiently that the budget contains plans to meet strategic intent. Nor do they put enough effort into examining alternative strategies.
Managers confirm some well documented problems associated with budgeting. Here are some of the more scary findings:
formalsubmissions to the Board or senior management) is 2.8. 20% of organisations go through five or more such iterations before agreement.
I don't know about you, but any one of the findings just listed is enough to send a shiver down the spine. Take, for example, the last one. As the budget year draws to a close, the organisation's managers are Hell-bent on meeting bonus targets that became outdated 7¾ months previously!
For many if not most organisations the budget is critically important. It is the basis of the commitment to stakeholders about short-term results. It is the primary means of exerting financial control and of promoting strong management performance.
Yet nearly half the companies report that management is unwilling to change.
They apparently accept the failings that everyone observes. Factories close, mergers and divestments occur,
redundancy programmes are announced, reorganisations take place with dizzying regularity, strategies are
changed, but the budget goes on regardless. As one person put it:
People are sceptical of the benefits, and budgeting never seems as high a priority as doing the 'real' work.
There is no one best way of budgeting - it depends on the circumstances of the organisation. For some, good forecasting is key; for others the use of activity-based techniques is the answer.
But for all, the budget needs to do three things well:
I find that the budget process of many organisations falls well short on all three counts. The challenge and the prize, are clear. It's time for action.