“We are beginning to believe that budgeting is inefficient.” So said one of the 152 financial directors who responded to a recent questionnaire on the budgeting process. The exclusive survey of Financial Director readers, conducted in association with Hyperion Solutions, the market-leading analytical applications vendor, found a disturbing degree of dissatisfaction with the budgeting process. In September and October, we surveyed the FDs of medium and larger-sized organisations, those with more than 1,000 employees or with turnover of more than £100m. Almost a third of respondents said that their enterprise-wide budgeting process scored 4 out of 10 or below in terms of efficiency. Surprisingly, perhaps, larger organisations – those with turnover in excess of £250m and which might be thought to have the systems, organisation and resources to make budgeting more streamlined – were even more critical of their own budgeting processes: 42% scored their system at 4 out of 10 or below. Overall, the average score was 5.36. Tony Speakman, director of marketing at Hyperion Solutions – a seller of budgeting applications to larger organisations – says: “We’re not surprised to hear that, but it is the larger organisations that have the resource to redress that issue. The medium-sized companies probably have nearly as many problems, but perhaps haven’t dedicated the resources to fixing them.” In other words, where there are fewer resources to solve the problem, businesses may just be getting on with it, rather than building an expectations gap for themselves. However, a considerable number of FDs also had a relatively high opinion of their budgeting process. Overall, 59% ranked their system at 6, 7, 8 or 9 out of 10 for efficiency (none scored 10), though that figure dropped to 48% for the larger companies. But FDs acknowledged that the perception of the budgeting process was perhaps not shared by budget-holders and business managers. FDs reckoned that less than half of their internal clients would rank the efficiency of the system so highly. This gap between the FDs’ view of the system and what the FDs believe their management colleagues think of the system carries its own problems. Speakman says: “The functional departments potentially see the budgeting process as an interruption to their normal working lives rather than as a key part of it.” Typically, FDs thought that 46% of budget holders and business managers would describe the budgeting process as “an efficient, value-adding process from finance”. One FD was particularly scathing of his organisation’s budget process: “Current budget process is non-value-added and done to meet top-down plc (head office) requirements,” he noted. There was no real “buy-in” to this process and it bore “little relation to reality”. Most damningly, he added: “Pig-weighing: non-VFM (value-for-money); Pig-fattening: VFM.” How depressing, then, that this FD reports that 45% of the finance function’s time is absorbed in such seemingly pointless effort. Another FD said that the whole concept of a budget was being totally “misused”, arguing that it was “primarily a means of setting up MD’s bonus schemes”. Distressingly, one said: “Most organisations I have been involved with waste far too much time using poor tools to attempt budgeting and it is questionable whether the time and effort spent is justified by the results.” By far the most commonly used budgeting process is bottom-up (75%), while half use a top-down approach. Clearly, many use both – though one FD remarked that his business uses “bottom-up – then adjust to what the board wants”. Around a quarter use rolling 12-month forecasts, and the same proportion use “this year plus x%”; 23% use zero-based budgeting. Bottom-up tended to be more widespread throughout larger businesses – perhaps because they have a greater number of discrete business units than smaller organisations – while rolling 12-month forecasts were more likely to be found in smaller companies (36%) than larger ones (20%). Whatever method was being employed, about a quarter of respondents had been using that method for more than the last three years, suggesting that there has been some effort to improve budgeting methodology recently. Almost a fifth said that they have been using their current methodology for more than 10 years (or “many years”). Although there is clearly a multiplicity of systems, a sizeable minority of respondents – about 40% – scored their systems at just 4, 5 or 6 out of 10 for the degree to which these systems were integrated. Of course, with 40% of respondents – in all size categories – using manual, paper-based systems as part of their budgeting, it’s little wonder they don’t score highly for “integration”. Only 26% said they were using specialist budgeting systems. Almost two-thirds of respondents said that the “culture” surrounding budgeting could be improved, though the process itself (59%), the technology involved (55%) and the organisation (36%) were also seen as areas where improvement could be made. Others mentioned “commitment”, “time allowed” and “control”. One made a plea for “honesty”, and not making “hopeless top-down financial forecasts to keep the City happy”. Another said: “Right hand doesn’t know what the left’s doing”. On a more positive note, one respondent said that it was important to educate line managers that budgets are “only a one-off prediction of the future and not an authorisation to spend”. Another added that “significant resource” was devoted to taking senior managers through an induction programme to train them in the system and process. “The success of any planning process lies with the involvement of all parties within the company,” reported another. But although “culture” was the most frequently cited issue that ought to be addressed, it was the introduction or upgrading of technology and software that ranked most highly as the one thing currently being done to improve the process. Small numbers said they were introducing rolling forecasts or zero-based budgeting, using improved spreadsheets or forecasting. Six respondents said – unprompted, honest! – that they were currently introducing or making wider use of Hyperion. One or two respondents said that they were looking for more relevant key performance indicators, introducing different reporting cultures, greater accountability, activity-based costing, a clearer strategy and greater realism, replacing budgets with rolling forecasts, or introducing greater discipline. One said simply, “Make things simpler”, while another said that his organisation was working to make a more explicit link between planning and the budget. More than a third said that budget managers don’t use the budgeting process to conduct what-if analysis, and 61% said that some budget managers do. What-if analysis is apparently more likely to be conducted within the finance department, however: a quarter said that they almost always do what-if, while 53% said they sometimes do it. Just under a fifth rarely conduct what-if. More than half of the time spent by the finance department on budgets is devoted to the mechanics of the operation, with just 27% of the time being spent on analysis. Negotiation (horse-trading?) takes up almost a fifth of the time. For managers, more than a third of their budgeting time is devoted to negotiating. When it comes to re-forecasting between budgets – and exercise that almost all undertake, if not always to the same level of detail as the budget itself – then there is a greater shift of effort towards analytical work, away from both mechanics and negotiation. Hyperion’s Speakman says: “When the process itself is arduous with little opportunity to do analysis, you see very little value in it. But with better tools to do the job and more iterations of your own data before you present it back to HQ, you would see it’s (a) less arduous and (b) more valuable. The issue is, is this a value-adding part of somebody’s job or an onerous task?” One respondent, at least, appears to be able to put more effort into analytical work in the budget-setting process: “Strategic planning and budget process (is) moving from a financial exercise to an evaluation of risks and approximations,” he noted. “The financial assessment of plans, budgets and forecasts is virtually mechanical and can respond to rapid changes in assumptions.” It’s when it comes to strategic planning that the budgeting process starts to get really interesting. Indeed, it’s when it starts to get to the heart of what the budget is all about. One respondent said: “The distinction between budgeting and planning is confusing. We do not budget as an organisation at the highest level. That is a detailed local activity.” Another gave a very upbeat explanation of how budgeting is integral to planning: “As businesses are being focused to provide more innovative and cost-effective solutions, the planning and budgetary processes are becoming more important.” But he also saw an even wider remit for the process: “Plans and budgets should not be solely financial but (should) cover all operations and functions to determine the business direction, its process and procedures, and ensure that the calibre and skills of its management meet the business needs.” How depressing, then, that another respondent should have said that the reason why his organisation never revisits its strategic plan is “boredom”.
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