New Flexibility in Budgeting?

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Flexibility and Budgeting rarely appear in the same sentence.

And, that’s a shame as better budgeting and planning tools can bring far more flexibility into the planning, forecasting and budgeting process. Those same tools can also help with integrating financial data and easing the workload of the managers who must submit and approve budgets. Let’s look at the process, integration and flexibility needs that modern firms require of great budgeting and planning solutions.

Repair the Process First

No planning/budgeting tool will be a success if the firm’s planning process is out-of-date, tedious and unloved by those who must use it.

In “The Reengineering Revolution[1]” by the late management guru Michael Hammer (and Steven A. Stanton) there is an amazing description of the budgeting process used by Amoco years ago (It starts on pg. 219). This excerpt really paints a picture:

“This nine-month gestation period virtually guaranteed that the results, when finally certified, would be obsolete or nearly irrelevant. Control budgeting also consumed the equivalent of 750 full-time employees, spread over a much larger number of people who were actually involved part-time. But no numbers can capture the contempt in which the process was held at Amoco.”

Thankfully, the book details the changes made to improve this process.

A new budgeting/planning tool should usher in a new process, new insights, and new metrics for running the firm. If the new solution doesn’t produce this, then the implementation team has likely set its sights too low or has ignored significant value-creating and change opportunities.

Ideally, the new solution should help each planning group identify how they will aid in increasing shareholder value via metrics or tools like DCF (discounted cash flow), MVA (Market Value Added), EVAtm [2] (Economic Value Added), OKRs (objectives and key results), etc. When the focus is on driving the right corporate outcomes, then individual managers can move away from low/no value-added concerns like tying their headcount or budget to their worth to the firm. Removing counterproductive behavior in the planning processes should always be an implementation goal.

That example is an important one as many managers are often more concerned about their power or stature in the firm than the effect of their budget on the firm’s fortunes. In companies where metrics like fees or people supervised are used to denote power or set a person’s compensation, then corporate capital will be misallocated and overall corporate profitability will suffer.

Likewise, without a connection to overall corporate direction and future company needs, many planners will continue to request capital and headcount for product lines that should be moved to harvest or wind-down status. When older solutions are not wound down well, promising new offerings are often starved for capital. The result is often a misallocation of capital and poor long-term performance for the firm.

The best processes are ones that are timely, efficient, value creating and illuminating. If managers describe your processes as a “chore”, it’s time for a change.

The Flexibility Problem

What planning technology you use and how you set it up are instrumental to your long-term planning success. There’s a saying in the software industry that “some products are quite flexible until implementation and then they behave like someone poured concrete in a gelatin mold”.

Flexibility challenges begin the moment a firm selects its budgeting/planning tool. The product brochure may tout all kinds of amazing capabilities but the way your firm configures and implements the tool may lock you into a very rigid process, a confining level of budgeting detail, and an inability to easily incorporate other data.

Spreadsheets are often seen as highly flexible but these technologies often lack critical functions. They may have been built by one person and used as templates for other planners to modify. This creates an integration and reconciliation problem as many, slightly different spreadsheets and values must be painstakingly mapped to a single master spreadsheet and then entered or integrated into a financial accounting system. The work to create the spreadsheet may be small but all of the other work post-creation is significant, tiresome, frustrating and certainly not value-added.

Planning & Budgeting software applications differ from spreadsheets. Application software must go through rigorous testing prior to commercial release. Spreadsheets usually don’t. Application software has version and release management protocols. Spreadsheets often do not. Test data is often created for applications while spreadsheets may only get a cursory bit of test data. Better planning applications come with pre-built integrations to a financial application suite. This permits easy downloading of prior actual financial data, easy uploading of new planning data and, in some cases, sophisticated functionality to automatically manage the planning process, follow-up reminders, etc. Some of the most capable packages include functionality to tie budgets/plans to OKRs, operational targets, sales plans and other metrics/goals.

Package planning/budgeting tools also have security and controls while spreadsheets rarely do. This means that some sensitive information (e.g., employee salaries) is only available to those with the appropriate permissions. The best solutions use the security and control rules found in their financial application software.

Where you also see a big difference between spreadsheets and budget and planning applications is in support for smartphones and in the level of collaboration built into the products. Packages handle the development of plans from top-down, bottom-up and numerous revision cycles. Packages can automatically push out the components of a plan to specific persons in your firm for their input. They don’t send entire schedules as much of it may be irrelevant (Interestingly, some planning tools will send the budgeting form to business leaders in a spreadsheet format if that’s the preference of the recipient. Otherwise, the recipient can edit their part of the plan over a cloud-based application.). Finally, better budgeting/planning tools use collaboration and workflow technology to send, receive and follow up with planners.

The bottom line is this: spreadsheets are great tools and are quite flexible. But spreadsheets aren’t applications per se. Yes, you can supercharge a spreadsheet with macros, embedded links to other worksheets, etc. But all of this requires maintenance and knowledge of this embedded intelligence. Remember, not all of the people involved in a budgeting effort are spreadsheet mavens. A packaged application handles a lot of this behind the scenes and comes with training and a pre-populated help system.

Integration Needs

A budgeting and planning tool that is tightly integrated with the core accounting applications can be a huge boost to planning productivity.

In such an environment:

  • Prior account balances and transaction details are immediately available. If you are a budget developer, you might want to click on a suggested budget balance and see how it compares to a moving trend of prior year-end costs. Tight integration makes historical comparisons easy and automatic.
  • Drill-down into prior expenditures can also help identify outlier expenses. You firm may have encountered a number of one-off or special costs in a prior year and users would want the opportunity to review prior years’ data to understand what a ‘normal’ year looked like. Likewise, an automated review of a given expense line item in the accounting software might highlight anomalous charges that should not occur in the new fiscal year.
  • Tight integration expedites the populating of initial budget values. Integrated solutions make this work effortless.
  • Tight integration also speeds the loading of final budget numbers back into the general ledger. This makes budget to actual comparisons in management reports possible.
  • Tight integration can reduce errors. When budget data is loaded into the general ledger, errors can occur if the account mapping is faulty. This risk is especially acute when spreadsheets are used as the budgeting tool and the accounting staff has made changes to the general ledger’s chart of accounts.
  • Tight integration should permit the use of consistent security and access controls of data. When the accounting and planning tools share the same application security and rules, then unauthorized access to data is avoided.

Flexibility in Planning

As humans, it is hard for us to imagine things in more than 3-4 dimensions. It taxes our brains. Planning and budgeting has a corollary issue: small changes in one assumption or planning variable can impact one or hundreds of budget amounts. Plans often reflect hundreds and hundreds of dependencies (e.g., payroll, training, benefits, office space and other costs are dependent on the number of employees in the company) and some of these fluctuate significantly over the course of a year (e.g., the need for seasonal retail workers to handle the year-end sales crunch). Managing all of these dependencies requires a tool that was purpose-built for such an environment. You don’t want a tool that can only manage one variable.

Mathematicians and economists use the concept of ceteris paribus (i.e., all other things constant) to help them with proofs and to examine causal factors. But with budgeting/planning technologies, that might not be a great concept.

Why? A business’ fortunes are rarely determined by one variable. Rudimentary plans often look at one or two metrics as key drivers for the plan. In a more complex firm, there may be hundreds or thousands of factors in play in creating the plan. Worse, some interdependencies will directly conflict with others. For example, a computer hardware manufacturer had three different product lines each with some measure of competitive overlap. It wasn’t unusual for two different sales teams to each propose their specific hardware to a given prospect. From a planning perspective, this is a problem as potential sales may be double-counted in the plan.

While it would be nice if firms only had one variable to consider when planning, multiple variables are the reality. Some of these variables could be:

  • The impact of weather on customer sales
  • The timing of when new sales professionals can actually become productive
  • The timing and cost of employee training
  • Warranty costs for new products
  • Whether sales promotions will be offered and how effective they will be
  • What moves competitors might make
  • Third party cost increases you can’t control (e.g., air fares)
  • Government regulation
  • New taxes, surcharges, etc.
  • Costs related to natural disasters
  • Unplanned strikes/labor disputes/work slowdowns
  •  

Buyers of planning/budgeting tools want a lot vis-à-vis flexibility. They want solutions that:

  • Allow users to model many different situations/scenarios without extensive data re-entry
  • Permit rapid and frequent recasting of plans (e.g., bi-weekly plans during the pandemic)
  • Automatically pull/update data from their financial application software
  • Generate new/revised plans in record time
  • Document/curate key planning assumptions and their effect on the budget
  • Send specific schedules/worksheets to relevant executives to complete or approve
  • Have built-in distribution logic to route budget requests, reminders, etc. to the correct manager
  • Have great security and utilize detailed permissions to prevent the discovery of inappropriate or sensitive data to the wrong persons
  • Are accessible anywhere, anytime
  • Identify and reconcile potentially redundant values
  • Automatically map individual schedule results into the combined budget database
  • Permit the creation of potentially dozens of different budgets (e.g., stretch, final, quarterly, finesse, etc.) as circumstances merit
  • Facilitate continuous planning

This list alone illustrates why budgeting/planning tools must be flexible.

Action Plan

Readers should, if needed:

  • Determine if they’ve outgrown their spreadsheet-based planning tools and, if so, initiate a software selection for something more robust
  • Investigate how new technologies could help with your rollout of a new planning process
  • Make sure any new solution integrates tightly with your existing financial accounting software
  • Diagram a new planning process workflow that is materially more efficient, faster and friction-free
  • Ensure new processes permit more frequent and timely plans while actually reducing the workload on those responsible for developing the plans
  • Quickly instantiate a new cloud-based planning solution
  • Tie new plans and processes to the achievement of new business metrics

While that may sound like a lot, the payoff for doing this could be huge. Is it time your firm made a planning change?

[1]The Reengineering Revolution – A Handbook”, Michael Hammer and Steven A. Stanton, Harper Business, 1995

[2] EVA is trademarked by Stern Stewart & Co.

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