Everything Planning Is Your Budgeting Process Broken? Improve Your Planning, Budgeting and Forecasting in 2023 How many people in your organization love planning, budgeting, and forecasting? Probably none. The mere mention of the name “budget” raises eyebrows and evokes cynicism. It should. There is much to laugh about when describing the agonizing annual budget and forecasting processes: Common Corporate Planning, Budgeting, and Forecasting Process Issues The budget data is obsolete within weeks after it is published due to ongoing changes in the environment. Customers and competitors usually change their behavior after the budget is published, for which often a prudent reaction cannot be accommodated in the budget. And today’s budget process takes an extraordinarily long time, sometimes six months before it is published, during which the organization often reshuffles and resizes. The budget is considered a fiscal exercise produced by the accountants and disconnected from the strategy of the executive team – and the mission-critical spending needed to implement the strategy. The loudest voice, the greatest political muscle, and the prior year’s budget levels are no longer valid ways to award resources for next year’s spending. Oftentimes, the corporate budgeting process is revised midyear or more frequently with new forecast spending. Then there is an excess amount of attention given to analyzing the differences between the actual and projected expenses. These include budget-to-forecast, last-forecast-to-current-forecast, actual-to-budget, actual-to-forecast, and on and on. This type of financial reporting provides lifetime job security for budget analysts in the accounting department. Budget numbers that roll up as cost center consolidations from lower- and mid-level managers mislead senior executives because of sandbagging (i.e., padding) by the veteran managers who know how to play the game. Reckless “use it or lose it” spending is standard practice for managers during the last fiscal quarter. Corporate budgets can be an invitation to managers to spend needlessly. Corporate budgets do not identify waste. In fact, inefficiencies in the current business processes are often “baked into” next year’s budget. Budgets do not support continuous improvement. The annual budget is steeped in tradition, yet the effort of producing it heavily outweighs the benefits it supposedly yields. How can the budgeting and forecasting process be reformed? A Sea Change in Accounting and Finance Let’s step back and ask a few broader questions. How many times have you seen an article or heard a presentation referencing the changing role of the chief financial officer (CFO)? How many times have you seen the obligatory diagram with the organization labeled in a central circle of the diagram and a dozen inward-pointing arrows labeled with the menacing forces and pressures facing the organization – like outsourcing, globalization, governance, brand preservation, and so on? Well, it’s all true and real. But if the CFO’s function is evolving from bean-counting and reporting of history into a strategic business advisor and enterprise risk and regulatory compliance manager, what are CFOs doing about the archaic budget process? The progressive CFOs now view budgeting as consisting of two streams of spending that converge as a river: Recurring expenses: Corporate budgeting becomes an ongoing resource capacity planning exercise no differently than a 1970s factory manager projecting their operation’s manpower planning and material purchasing requirements. These are derived from forecasts of future demands (e.g., sales volume and mix) multiplied by unit-volume cost consumption rates. Non-recurring expenses: The corporate budget includes the one-time investments or project cash outlays to implement strategic initiatives. The primary ones are for (1) capital investments, (2) strategic initiatives for the strategic objectives typically associated with a balanced scorecard, and (3) risk mitigation actions associated with an enterprise risk management (ERM) program. Corporate Budgeting Software May Be the Key Your Business Needs My first off-campus job as a young undergraduate was flipping burgers at a fast-food restaurant. I was somewhat surprised to learn that the standard operating plan included making a certain number of burgers in advance of the daily rush rather than making the burgers when they were ordered. As you might guess, the restaurant’s static operational forecasting model was accurate about 50% of the time. The rest of the time we were either faced with significant waste or standing crowds waiting for their orders. I can’t imagine running a profitable business today with a financial budget that only hit the mark 50% of the time. But with static, inflexible annual budgets based on last year’s numbers – what more can you expect? Today’s solution to solve the corporate budgeting conundrum and the organization’s rear view mirror backward-looking focus is to begin with software designed for planning with reporting and analysis capabilities. Speed to knowledge is now a competitive differentiator. The emphasis on improving an organization and driving higher value must shift from hand-slap controlling towards automated forward-looking planning. A flexible and collaborative planning environment is created. It provides on-demand information access to all what-if scenarios and trade-off analyses. For the bold CFO who is not wary of radical change, continuous and valid rolling financial forecasts can replace the rigid annual budget. More answers are needed than just “Are we going to hit our numbers in December?” That’s not planning but rather performance evaluation. For the traditional CFO, the financial planning software offers a needed high-speed corporate budgeting process. Stay on Plan, Not on Budget Corporate budgeting is not a strategic plans – it’s a detailed what-if scenarios based on certain assumptions. It always amazed me as a business consultant how many managers and owners would use their static budgets as an excuse for a decision saying, “It’s not in the budget.” My response is usually shock. Your budget doesn’t allow you to consider how to address opportunities or navigate threats? Budgets need to serve the strategic plan, not the other way around. And in today’s dynamic environment the most efficient way to do that is to utilize business budgeting software that allows stakeholders to enter new scenarios and assumptions and see how it affects the bottom line in future months, and then effectively communicate those results across the organization. In this way, the corporate budget serves as a precision what-if scenario for managers seeking the best opportunities to advance their long-term strategic plans. Your plans should be data-driven first rather than budget-driven. Actual operational data should be behind predictions of future sales performance. Plans are based upon real-world numbers enable you to more quickly change your strategy upon any changes. If your solution is one that unifies your organization’s departments, these numbers can be updated automatically. Say Goodbye to Corporate Budgeting Headaches with Kepion Planning Nothing creates more headaches for those tasked with creating a budget or forecast than having multiple versions of the truth. Accurate planning requires accurate consolidated financials based on real-time transactional details. The only way to efficiently keep a set of real-time consolidated financials available for forecasting is to use business budgeting software that also handles the daily transactional inputs. Modern business budgeting software, like Kepion Planning, allows you to be more accurate in your short- and mid-term planning by creating rolling forecasts based on real-time data. The rolling forecast function automatically imports actual data from other systems, along with ongoing updated data, and projects what your financial situation will be over the next 12 – 18 months. Commercial financial planning software also offers many features, including signaling dashboards, reporting and analysis, consolidation reporting, dynamic drill-down, customizable exception alert messaging to minimize surprises, Excel linkages, multiple versioning, and more. When the various enterprise and corporate performance management (EPM/CPM) methods are integrated major problems are resolved: lack of visibility to causality, lack of timely and reliable information, poor understanding of the executive team’s strategy, and wasted resources due to misaligned work processes. EPM/CPM provides confidence in the numbers which improves trust among managers. What will accelerate the adoption of reforms to the budgeting process and a management culture for EPM/CPM methods? Does it involve senior management’s attitude and willpower or the information technology that can realize the vision described here? I’d choose both. It’s corporate budgeting the way business needs it. What could be better? If you’d like to learn how use it or lose it corporate budgeting solutions can support your organization’s needs, request a demo of Kepion today.