Planning & Budgeting
In today’s uncertain and fast-changing world, sound strategy, good people, and world-class processes only count for so much, and success or failure are likely to be determined by factors that are outside of our control. There is a myriad of external factors such as technology, competition, regulation, consumer preferences, and global economics that combine in complex ways to throw up opportunities and/or threats. We cannot predict what form they will take or how long they will last.
In order to be adaptable, organizations need to equip themselves with two distinct capabilities: better visibility into the murky future and greater agility to execute and respond effectively and efficiently.
At the strategic level, visibility comes from systematically scanning the external market and everything that might possibly impact it, looking for patterns and inconsistencies that might suggest the germs of an opportunity or threat. The data will be incomplete, fleeting and frequently contradictory. At the more tactical, short-term level, all the assumptions that an organization has about its markets and its ability to achieve its financial goals are set out in its annual budget. This short-term view needs to be constantly revisited both to 1) indentify any early warning signals (that might indicate that the assumptions that underpin longer-term strategy no longer hold true) and 2) to fine-tune current-year performance.
Many companies realize they do not forecast as frequently as they would like which compromises their visibility into the future. But the failure to forecast regularly also compromises organizational agility. In this context, agility is the ability to sense changes in both the external environment and the internal organization, and respond appropriately and efficiently to those changes. Sometimes this might mean simply re-aligning resources and expenses to a new level of trading; at other times it might mean doing things completely differently or perhaps even reviewing the strategy. Frequent forecasting and dynamic budgeting are therefore one of the key building blocks of the agile organization.
But currently, most organizations are caught in a logjam. They want to forecast more frequently, but their current planning & budgeting processes are so laborious that even those who have purchased packaged budgeting applications are still not much better off than those who still budget on spreadsheets. A typical budgeting process usually takes 3 to 6 months to complete. In some extreme cases it even takes longer. The traditional planning & budgeting process is internally focused and copes poorly with change. It is inflexible and constrains people from responding quickly and effectively within and across organizational boundaries. Managers are often primarily concerned with the performance of their own department and fail to see how they can help to meet the broader strategic goals. Even when large amounts of money have been invested in new software, the applications have usually been put in place based on inefficient processes. This locks a company into its past planning & reporting habits, when changes really need to be taken to realign the processes with a new situation.
Do you recognize any of this? Do you also suffer from any of the below symptoms of traditional planning & budgeting?
· Time consuming and costly.
· Constrained responsiveness and flexibility.
· Often a barrier to change.
· Rarely strategically focused and often contradictory.
· Adds little value, especially given the time required.
· Concentrates too much on cost reduction and not on value creation.
· Encourages ‘gaming’ and dysfunctional behavior.
· Not updated frequently enough.
· Based on unsupported assumptions and guess-work.
· Impedes empowerment.