Everything Planning What’s Broken about Budgeting? How many people in your organization love the annual budgeting process? 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 There is much to laugh about when describing the agonizing annual budget process: The budget data is obsolete within weeks after it is published due to ongoing changes in the environment.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 dis-connected 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 The loudest voice, the greatest political muscle, and the prior-year’s budget levels are no longer valid ways to award resources for next year’s spending. Often the budget 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 reporting provides lifetime job security for the budget analysts in the accounting department. Often the 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. Budgets can be an invitation to managers to spend needlessly. 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 budgeting be reformed? A Sea Change in Accounting and Finance Let’s step back and ask 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 an enterprise risk and regulatory compliance manager, what are CFOs doing about the archaic budget process? The progressive CFOs now view budgeting to consist of two streams of spending that converge as a river: Recurring expenses – 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 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. The Financial Management Integrated Information Delivery Portal Today’s solution to solve the budgeting conundrum and the organization’s rear view mirror backward-looking focus is to begin with a software designed for planning with reporting and analysis capabilities. Speed to knowledge is now a competitive differentiator. The emphasis for improving an organization and driving higher value must shift from hand-slap controlling towards automated forward-looking planning. With planning software a flexible and collaborative planning environment is created. It provides on-demand information access to all for what-if scenario and trade-off analysis. 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 budgeting process. Commercial financial planning software offers many features – 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 today will accelerate the adoption of reforms to the budgeting process and a management culture for EPM/CPM methods? Does it involves senior management’s attitude and willpower or the information technology that can realize the vision described here? I’d choose both.