GL_I_Budgeting_1_A

This article was first published in the October 2015 international edition of Accounting and Business magazine.

Planning, budgeting and forecasting (PBF) is an underutilised and ineffective process in many organisations. Although the finance department should shoulder some of the blame, the cultural attitude of the wider organisation needs to change, as does organisations’ use of technology and data.

Markets move more quickly than ever before and are more complex; there is also greater competition. These pressures make the need to forecast all the more acute. ‘Companies need a much better steer on how external factors are impacting their business and how the decisions companies take are impacting performance’, says Jamie Lyon, ACCA’s head of corporate sector. If companies could obtain that better steer and translate it into an effective PBF process, they could gain a distinct competitive advantage.

But few organisations seem to recognise this. Although CFOs may accept that PBF is an increasing priority, an ACCA/KPMG study reports a high degree of cynicism around PBF procedures. Almost one in two (46%) of those surveyed said their annual budgets were politically agreed numbers, generated from the top of the business and not linked to operational reality. Over 62% said budgets simply reflected a point in time and quickly ceased to be relevant as the financial year went on.

But that is not how it should be. ‘Within the enterprise, PBF is central,’ stresses Lyon. ‘The starting point is having the right enterprise culture. Tone at the top and visible support is critical in integrating and effectively delivering these activities into the business. It has to be a real partnership approach between finance and the wider organisation in ensuring that strategic alignment.’

It is that word ‘strategic’ that is crucial. John O’Mahony, head of KPMG’s Enterprise Performance Management team, notes that every organisation – whether in the public or private sector – has objectives. ‘PBF is about turning those objectives into a strategic plan which, in turn, forms the basis of targets,’ he says. ‘These can be used to create in-year budgets so that operationally you deliver the strategy that fulfils the objectives.’

O’Mahony says no one would get in a car in London and want to get to Edinburgh but have no idea how to get there. ‘If organisations just meander it is ineffective and inefficient.’ This meandering is often caused by that lack of partnership between finance and the rest of the business.

‘Forecasting in most organisations tends to be weak because it is done by finance on its own without suitable input from operations,’ says O’Mahony. If it is finance-owned and not properly integrated into the wider planning cycle of the business, it is going to fail. The quest is for an integrated model that takes operation’s predictions and monetises them as part of informing a financial forecast. But first of all organisations have got to take the process seriously. ‘A lot of organisations see budgeting as an exercise that must be done’, says O’Mahony. ‘So the approach is “What can I get away with?” These problems are cultural, organisational and technical.’

Short-term targets

The ‘what-can-I-get-away-with?’ attitude has wide consequences, especially for the corporate culture surrounding target-setting. The study found that planning and budgeting was often focused around short-term targets and not linked to achieving the strategy over a three- to five-year period. Linking employee incentives to the short rather than the long term, says Lyon, creates the problem of lowballing. ‘Perversely, managers in » business divisions may be able to get away with setting short-term targets that are easily achievable. Do they understand the build-up of revenue and costs and what is possible for the business to achieve?’ This leads to a further question of whether finance has the skills and the capability it needs to challenge during the PBF process. A poor process enterprise-wide leads to sub-optimal decision-making and a strategy that is not aligned to the reality of the delivery.

The study found that organisations are struggling to use data analytics effectively. Over 30% of the financial professionals surveyed said that the quality of the data was the biggest impediment to using data analytics in their planning processes; 17% said that management ignored the data and simply pursued the same decision regardless. Quantity of data is also cited as an issue.

‘Companies need the right data and it needs to be visible,’ says Lyon. ‘Unless you have the propensity to take in all the different data flows – internal and external – you struggle to understand where your business is heading. Data has to be robust, accurate, timely and visible.’

Ian Preston, vice president sales, UK & Ireland, at software-as-a-service business analytics provider Adaptive Insights, understands the shortcomings.

‘A universal data source of consistent data for strategic plans, budgets, forecasts, scenarios and actuals is a goal that few companies achieve,’ he says. ‘The common mistake is a big-data approach, drowning in detail. A more focused view of what is necessary to support decisions works best.’

When all else fails, corporates tend to turn to technology to provide a solution, but O’Mahony warns against trying that approach to sort out PBF issues. He says: ‘Technology is an enabler but it is not a silver bullet. There is no system out there that you implement and it immediately gives you the answer.’ Instead, says O’Mahony, companies need to define the strategic planning model, which will in turn define the budget model. Processes, structures and reward mechanisms need to be in place. Then, when a company has the building blocks, it can start creating a technology specification to make a system investment.

Erosion of trust

Inaccurate data and technology are intrinsically linked, eroding C-suite trust and, the survey suggests, encouraging them to base operational decisions on instinct rather than insight. And the distrust is leading to underinvestment in finance technology. Of those surveyed, 41% said that they haven’t invested in a planning tool other than Excel; and, of those who had, 28% said it hadn’t delivered the benefits expected, setting them back yet further.

‘Organisations need a company-wide holistic technology solution,’ says Lyon. ‘If it is not joined up, inevitably there are lots of reconciliations between systems and that is an ongoing challenge for finance.’

But if a company spends well and on the right technology, it could expect to reap benefits such as real-time reporting and continuous improvement. Lyon says that CFOs should be asking themselves how quickly they can produce their forecasts and how quickly can they change their plans.

Preston thinks that there may be a workable solution to quieten the doubters: ‘Cloud-based planning and budgeting technology allows finance to provide consistent finance and business data throughout the business in a much more timely and collaborative manner,’ he says. ‘The web is a force for good in better joining up globally remote business units.’

The good news

A chink of light amidst the general gloom that hangs around PBF can be found, according to O’Mahony, in a couple of places. He says that the FMCG (fast-moving consumer goods) sector, led by multinationals such as Procter & Gamble and Nestlé, have successfully embraced a PBF strategy. ‘This has given them insights to make better decisions based on facts, which in turn have led them to be dominant on a global basis,’ he says.

O’Mahony also commends e-commerce corporates such as Amazon. ‘While they did not have to wrestle with legacy baggage, they took advantage of the clean sheet of paper and adopted leading-edge PBF models from the start. It is part of their DNA and it has equipped them to perform more efficiently and run their operations in a way that optimises the business model.’

To other CFOs who may not be in that happy place, O’Mahony makes the following suggestion: ‘CFOs should step back to see where their organisation is in terms of their ability to forecast quickly, gain insight and look forward to see how the business is likely to perform,’ he says. ‘If not, they will be failing to exploit opportunities.’ Companies are all about driving shareholder value, and a robust strategic planning process helps – year by year – to maximise the efficiency and effectiveness of the organisation. ‘By performing a strategic planning process, companies are attempting to reward the shareholders so that they are willing to continue their investment.’