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Speeding up your budget

Late. Uninformative. Disorganised. Scratch an FD, and you’ll often hear their company’s budgeting process described in such terms.

Poke a little further into budgeting practice, and more unflattering descriptions emerge. “Budgeting simply takes too long, demands too much detail, is too expensive and requires too much effort expending on it,” believes Jacky Poss, a director with IBM Business Consulting Services, formerly PricewaterhouseCoopers’ consulting division.

And while businesses have spent a fortune on computer software over the past decade, little of that expenditure has been directed at a process that, in many cases, remains a largely spreadsheet-based “ivory tower” exercise. The result? “Budgeting has become discredited in recent years,” believes Mark Stimpson, vice-president of international marketing at Adaytum.

He believes that: “The resources consumed is out of all proportion to the benefits – and the actual financial results, when they come in, bear little resemblance to the forecast.”

But budgeting doesn’t have to be this way. A clutch of leading-edge companies are showing that it’s possible to re-engineer the budgeting process, transforming it into a genuinely useful management tool. The path isn’t always a smooth one, but – unlike the budgeting process itself – the journey is usually worth it.

“We’ve more confidence in our budgets, the process is faster, and the workflow suits the way we operate,” says Helen Gourlay, group financial accountant at Peterhouse plc, a £450m mini-conglomerate based in West Yorkshire.

Peterhouse has implemented a budgeting system from Swedish-owned software company Frango. The reason? A desire to get a better qualitative handle on balance sheet budgeting, as well as to improve the efficiency of the conventional P&L budgeting process.

The company’s subsidiaries, Gourlay explains, tended to concentrate on P&L forecasting, and spent little time on the balance sheet aspect of the exercise. Using a Frango “template” that Gourlay developed, subsidiaries provide information on items such as cashflow, debtor days and earned interest, based on company-wide assumptions contained within the template on variables such as interest rates.

But to fully understand the transformation that Peterhouse went through, explains Frango’s Bracknell-based account manager Kevin McCarthy, you need to step back and take a look at the world’s market-leading budgeting tool: the ubiquitous Excel spreadsheet.

“Most companies use Excel for budget consolidation and planning, but it’s fundamentally a desktop productivity tool – and what’s more, one that’s very general in nature,” says McCarthy. “It’s better described as a technology, and it doesn’t come pre-equipped with any budgeting functionality.” What’s more, he adds, Excel doesn’t lend itself to efficient workflow.

In whose in-tray is each budget revision sitting right now? Who has signed-off on which budget? Who still needs to be chased?

All of which are shortcomings very familiar to Mark Muller, FD of £300m furniture retailer Courts (UK). Distributing Excel budget spreadsheets to almost 120 individual store and area managers was a step forward from the previous top-down approach, he says. “We wanted to bring in a bottom-up budgeting process, utilising the expertise of the local managers, who knew what was going on in their areas.”

Distributing Excel spreadsheets was fine in theory, but it rapidly became a time-consuming behemoth – and one that failed to produce the “buy-in” that Muller was looking for. “People could put in data alright, but they were only entering it into their own part of the budget. They could see the input – but not the output, and couldn’t see the impact of their action on the bottom line,” says Muller.

“Even worse, the shift from top-down to bottom-up was putting the company’s infrastructure under strain. Take, for example, the IT function: budget deadline. Friday mornings became notorious for slow network traffic, as 3MB files came in from over a 100 stores and regional managers. And once received, they had to be error-checked and compiled into a single budget – a process that took five days.”

There had to be a better way, and Muller once more went back to the drawing board. The objective: a bottom-up budget – but one that didn’t drag the business to its knees, and one that used genuine budgeting software, rather than spreadsheets press-ganged into a job for which they weren’t designed.

The solution adopted by Courts (UK) came in the form of a budgeting package from another vendor, Adaytum. The budgeting package in question, Adaytum 3, combines a user-level budget tool, “Contributor”, which is run by the store and area managers, with another tool, “Analyst”, which is used within the central finance function. Run online, it dramatically reduced the network congestion – as well as the time taken to compile. “We took three or four days out of the process at a stroke,” says Muller.

Best of all, the solution uses terminology that the users are familiar with, rather than financial jargon. Within Courts (UK), terms like deliveries, sales, and cancellations are well-understood. The spreadsheet approach had asked for inputs on turnover, sales before VAT, and orders, which required some off-line calculations and adjustments before being input.

“IT-literate managers can complete the budgeting process in one-to-two hours, as opposed to two-to-three days,” says Muller. What’s more, the training to use the package was rolled out at normal monthly regional management meetings, and took about an hour.

Nor are such improvements unusual for those that have made the effort to re-engineer their budgeting process. A similar story emerges from dmg world media, a group of companies owned by media giant Daily Mail & General Trust. Michael Sicely, executive vice-president of finance, explains that dmg has rapidly grown in recent years from its roots as organiser of the Ideal Home Exhibition, with revenue soaring from £18m to £170m in just eight years.

Coupled to organic growth in its traditional markets of the UK, North America and Australasia, the company has been on the acquisition trail, and has bought a host of other companies in the exhibition market. And therein, of course, lay the problem in budgeting. “While some of the acquisitions were big businesses, some were essentially ‘mom-and-pop’ businesses run from a kitchen table, and were used to budgeting on the back of the proverbial cigarette packet,” says Sicely.

Once again, a budgeting package, this time from Comshare, transformed the process. “It used to take four-to-five weeks, and all we’d have was a number at the bottom right-hand of the page – about which we understood very little,” adds Sicely. Now, the process takes four days, and can be managed remotely. The latest 2003 budget reviews, he points out, were actually completed from a hotel in San Francisco, where the senior finance team were attending a management conference.

Indeed, it’s when the international dimension is taken into account that budget re-engineering comes into its own, as the difficulties of scale, language, time zones and geography conspire to throw more spanners into the works.

For example, take Murray Inc, an $850m global garden equipment manufacturer – better known in the UK for its Hayter lawnmower brand, and in the US under its Stanley brand. The company’s large US manufacturing facility, supplemented by two manufacturing plants in China, supplies not only the North American market but also seven distribution operations across Europe.

The result is a multiplicity of legal and trading entities – some 32 separately budgeted entities, each with between 30 and 100 departments.

Consequently, the budgeting process had become something of a nightmare, says applications system manager Rose Melillo, the accountant in charge of a project to re-engineer Murray Inc’s budgeting. Budgets were taking six months to put together, she explains, and by the time they were complete, they would already be out of date. Individual cost centre budgets would roll up to a consolidated cost centre budget, but only rarely would they get to a budgeted net income or P&L figure. “There would be a high level number, alright, but this would never balance back to the budget,” says Melillo.

Inevitably, with such a protracted process, version control was difficult.

“At the monthly close meetings, 15 different people would have 15 different budget figures,” she says.

The solution? A budgeting tool from CODA, co-developed with Cognos, and with an Excel-like look-and-feel. With the business changing rapidly in the aftermath of September 11, the decision was taken to implement the new tool in a single month, a timescale which Melillo drily observes she wouldn’t recommend – even though, she insists, it’s perfectly possible with good planning.

The budgeting cycle now takes 6 weeks – and is done right down to sku level, with 480 skus. Or even more quickly, in exceptional circumstances: in the aftermath of President Bush’s imposition of steel tariffs in early 2002, the entire cycle is repeated every two weeks. “Because it doesn’t take so long to collect the data, we can now spend more time analysing the numbers,” says Melillo.

But fascinatingly, Murray Inc discovered that although they had bought a budgeting tool, it had enabled them to transform the monthly and quarterly financial close, thanks to the commonality of the financial and budgeting systems. Melillo says: “Forty-five minutes from putting in the last journal entry, we have full consolidated financial statements, product line P&L, and gross margin analysis – right across the 32 companies.”

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