Is your budget process first class?

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I read a blog recently that got me thinking so I thought I would share it with you. It's by Peter Homan, a seasoned CFO, and I think you'll find it interesting.


Is your budget process first class?

Many organisations tolerate budget and forecast processes that are tedious, onerous and produce poor quality output.  Why is this so?

There are lots of reasons but not too many excuses! I reckon they boil down to three factors:

  • They do not treat budgets as 'real' projects
  • They do not consider that budgets are a repeatable process, that can benefit from investment of time and money to create more effective and efficient processes.
  • The effort is concentrated into a short and intense period, without regard to whether each component is part of a critical path, or could be done outside of the 'public' part of the budget.

The key to delivering high quality budget processes and outputs is to regard budgeting (and by extension forecasting) as a RECURRING PROJECT with periods of low and high intensity!  If you do this then you can justify investment, and apply project management (PM) disciplines to the task.

PM is pretty well understood in corporates these days, so my comments are high level and assume that project monitoring and milestone management will occur.

Most importantly, the owner and / or sponsor of the budget, often the CFO, should determine and then communicate IN WRITING to key stakeholders (e.g. contributors, Leadership Team, Board etc.) the project issues (including):

  • Timeline, including key meetings and approvals
  • Key assumptions (specifically addressing materiality - e.g. adjustments of <$1,000 per line item will not be processed)
  • Context - e.g. 'most likely scenario', 'excluding acquisitions',
  • Expectations of effort required by key people, including who is project manager
  • Description of key outputs including defining KPIs, and potentially extent of Sensitivity Analysis
  • Identify critical path issues (e.g. revenue growth from new customers, tax cannot be done until profit before tax and capex numbers are finalised, we need capex before we can determine depreciation etc.)
  • Process for resolving issues (e.g. I am not agreeing to that sales target; OR I need a bigger capex budget; OR my bonus pool needs to be bigger) - which could be a scheduled leadership meeting, or a decision by a nominated executive.

The objective of the communication is to reassure stakeholders, often with their own agendas, that someone is thinking about the issues, genuinely wants input from them, and is working hard to ensure that their effort is minimised, often by focusing their efforts on the material items over which they have control or expert knowledge (not the 'rats and mice').

[Tip] Make sure someone in your team is good at project admin and at nagging, whilst still keeping everyone 'on-side'. Also, get your webmaster to devote part of your intranet site to the budget effort - you will be surprised who will read it!

Pretty standard so far?  Well most PM is applied to ad-hoc or strategy projects.  But some projects reoccur and can be templated, whereupon the input adheres to the Pareto Principle (or 80:20 rule) - that is 80% of the effort is usually directed at 20% of the task - unless you template / standardise / centralise it!

This means building infrastructure to create repositories of quality information, and reduce future effort by feeding into the budget database or pre-populate the budget templates. Wherever possible this information should be widely disseminated amongst the budget contributors and they should be asked to critique - no feedback is assumed as agreement.  For example:

  • Leasehold premises costs are generally subject to multi-year contracts, are reasonably predictable, and are subject to corporate approval - why not create a central database of all leases to create forecasts of future costs including estimates of outgoings (by cost centre).  The effort to roll forward to next year is minimal and can be updated outside of the core budget period.
  • Travel costs - create a template requesting business units to provide NUMBER of trips (by type) and room nights, and control pricing centrally
  • Communication costs (broadband, landline, and mobile) - create estimates based on last [three] months, and [fixed] contracted expense

Other smaller costs can also be centrally forecast, based on recent history and anecdotal knowledge.  Even if you misjudge by a significant percentage the materiality of the cost means that the budget will be impacted unduly.  Examples often include:

  • Minor expenses such as taxis, entertainment, petty cash, stationary
  • Professional and consulting costs
  • Licensing and Maintenance costs - software, hardware, building equipment (escalators, lifts etc.)
  • Printing
  • Replacement capex (printers, PCs, tablets)
  • Repairs and Maintenance

Most of this documentation can be rolled forward each period with minimal effort, and each period it should incorporate learnings from the prior period.  By doing so the Finance Team is training the organisation about expectations, and removing excuses about either the input or output (i.e. You did not tell me that; OR that's not what I agreed to) [or as the Grumpy CFO likes to say 'training the less evolved life-forms']

Of course using good tools improves the work of the tradesman and business intelligence solutions are make the building of infrastructure exponentially easier - but that is the subject of another blog.

The parting thought

In Northern Australia they muster wild scrub bulls and other cattle from large unfenced areas using helicopters, often leading them to [temporary and inexpensive] fences made of hessian strung up between trees, sometimes kilometres long.  Inevitably the [up to] 1,000 kilogram scrub bulls, leading the other cattle, follow the hessian fence which they could easily charge through - drafting the cattle into steel stockyards for either branding or eventual shipment to an abattoir.  I think good budget processes are analogous to hessian fences!

Future blogs will include:

  • Checklists of common tasks within the budget process
  • The golden pieces of budget output - the schedules you should have produced!
  • How to get buy-in from senior operational managers (and maybe even your CEO)
  • What is a 'people cube' and why you absolutely need one.
  • Why it is essential to write a budget analysis document, and why it is useful to your key stakeholders
  • What is important when selecting a BI solution (an often the software is not the most important thing)

If there is a topic that you would like the The Grumpy CFO's opinion on please visit the original blog post and leave a comment.
http://thegrumpycfo.blogspot.com.au/2013/05/many-organisations-tolerate-budget-and.html

If there is a topic you would like our opinion on, please leave a comment here.

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