by Robert D. Kugel CFA |
6/20/2008 | Article ID: B08-23 | Article Type: VentanaView
Summary
Planning and budgeting processes consume a significant portion of a finance department’s time. Yet as revealed by Ventana Research’s recent benchmark research on planning and budgeting, it may not be spending that time optimally. Participants from fewer than half of all participating companies said they spend the right amount of time on planning and budgeting. The most common complaint is that the company spends too much time, and this is certainly the case for larger companies. However, we also found that those from midsize organizations were as likely to say they spend too little time on it as too much.
Benchmarking the planning and budgeting process typically concentrates on how much time companies spend; we believe this misses the point. How companies spend that time is what counts. The optimal amount of time spent on a useless process is no time at all, but time spent well is an investment. We assert that most companies need to fundamentally re-examine their planning process to improve its value as a management tool. Improving planning and budgeting will increase a company’s operational effectiveness by yielding a better collective understanding of operational and functional objectives, closer alignment of these with strategic objectives and the capability to optimize efforts across the organization.
View
Finance departments in just under half of the companies that participated in our benchmark research spend 20 percent or more of their time on planning and budgeting. Nearly two-thirds of them spend more than two days a month. For them, planning and budgeting represent a significant investment of time and effort. Is it worthwhile? Maybe. Only four in 10 participants said their company spends the right amount of time and the same percentage said they spend too much time; 15 percent said they spend too little. The research (sponsored by Adaptive Planning and Infor as well as media partners Institute of Management Accountants, Montgomery Research, searchOracle.com and searchSAP.com) found a correlation between a participant’s assessment of the time spent and the size of the company: Half of the participants from very large companies (with 10,000 or more employees) said they spend too much time, almost twice as many as the 28 percent of people saying so who work in midsize companies (100 to 999 employees); conversely, only 6 percent of those who work in very large corporations said they spend too little time, compared to 28 percent of those in midsize companies.
Yet we found that assessments of the value and quality of the plans and budgets that people produce were unrelated to assessments of the amounts of time spent. Participants who said their budgets are accurate were just as likely to say they spend too much time on them as those who said theirs are inaccurate. The same lack of differentiation held true for how well the budget remained relevant over the course of the budget period (in most cases, the fiscal year) and for alignment between the budget and the company’s strategy.
These results confirm the commonsense notion that companies would do better to focus on the effectiveness of the process and find ways to make planning and budgeting more of a performance management tool. Improving effectiveness usually involves making sure the right things are measured and reviewed so that individuals have better insight into their and their business unit’s performance – that they understand the reasons behind the numbers. Instead, companies often fail to derive as much value as they could from the planning and budgeting process because in actuality their major objective is no more than to have a budget book available for the board of directors’ approval three weeks before the start of the fiscal year.
Another structural obstacle to more effective planning and budgeting is limited integration between the financial planning process and the operational planning done in other parts of the business. For example, only half of the participants in the research said that their budget is integrated with their sales and operations planning (S&OP) process. Yet even here most of these companies have an annual budget and quarterly reviews, while typically S&OP cycles are weekly or monthly. In other words, while there may be a higher degree of integration once a year, the connection disintegrates as the fiscal year wears on. This becomes more acute because, as the research also shows, when major changes are needed, only 17 percent of companies do a complete revision to the budget; the rest either do nothing (and work around it) or do a short update.
Assessment
Allocating the right amount of time to planning and budgeting is important, but focusing on the amount of time spent risks missing a major objective of this core process. Planning and budgeting are cornerstones of performance management, and we advise companies to focus on using them for this purpose. This way they can ensure there is alignment between the budget and the company’s strategy, close agreement between business units’ plans and the financial plan, an ability to connect individual objectives to corporate goals and the ability to evaluate performance compared to those individual plans.
Addressing these objectives often involves rethinking the budgeting and planning processes themselves. Equally important, in our judgment, is the type of software the company uses to support the process. Currently a majority of companies use spreadsheets to manage and support the process. Yet our research finds relying on them is a major barrier to improving effectiveness, while dedicated planning and budgeting applications promote it. A dedicated application alone will not enhance the value of the process, but it can eliminate a major barrier to making planning and budgeting a more effective management tool.
Related Research Notes
Better Planning and Budgeting
Rethink the Purpose, Scope and Objectives of Your Process
Planning and Budgeting Remains Immature
Few companies have tied it to performance management
Plan While You Can
Seize the opportunity to adopt driver-based planning
The Importance of Planning in Midsize Companies
Appropriate planning and budgeting is key to performance management
S&OP – A New Approach to the Single Enterprise View
S&OP integrates fragmented plans to improve operational performance
Keep Sales and Operations Planning Simple
Research shows that best-performing companies create aggregate plans and review them monthly
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