Part 2 in the 10-part Collaborative Enterprise Planning series
Budgeting is the mainstay of most organizations’ management control systems. But it’s one that rarely adds value, with participants often involved in an elaborate game of bagging resources. Here’s why:
- Budgets tend to be set annually with a process that can start 3-6 months earlier, which means departments are trying to guess what may happen some 18 months in advance – which is impossible in today’s business environment.
- Costs are typically set as ceilings and revenues as floors, so sandbagging is rife as no one wants to be the villain when variance reports are produced.
- Similarly, rewards are often tied to the performance of the budget. As a result, budgeting is more concerned with people’s personal well-being and not necessarily the best interests of the company.
- There often is no obvious link to actions that lead to the organization’s long-term objectives; these are assumed to be included with the numbers but rarely are.
With all these shortcomings, it’s surprising that budgeting is still carried out. But it doesn’t have to be this way. Collaborative enterprise planning can overcome these weaknesses through a combination of re-evaluating management practices and employing the latest in collaborative intelligent finance solutions.
The role of collaborative enterprise planning in setting budgets
First, recognize that the role of budgeting is to assign resources to the activities that make up the organization’s strategic and operational plans, which should ideally identify:
- What activities should carry on as-is at present
- What activities should be abandoned or changed
- What new activities should be adopted
Each activity should have measures that denote its success and identify the departments responsible for that success. Budgeting is then a process of communicating to those responsible, at a summary level, the importance of the activity from a corporate point of view, how success will be measured, and an idea of the resources that can be consumed. These can be considered targets.
Once communicated, the role of operational managers is to review, provide feedback, and confirm allocation of the resources that they believe are required for each activity. Note that the focus is on activities and not necessarily departments. There is no point in one department setting a budget if another department cannot achieve a shared activity.
As plans are collected, senior managers will be able to assess whether the activities are the right ones and whether the costs involved are worth it. From this, alternative action plans may be required.
This process is iterative until resources are aligned with activities that produce the intended goals. Once set, the plan is then monitored for both the resources consumed and their impact on corporate goals.
Have you ever wondered why budgeting is an annual process that is then set in stone and can’t be changed until the following year? If the world changes in the meantime, it doesn’t make sense to continue with a plan that will never work.
There is no reason why this budgeting process can’t operate on a continuous basis. If activities need changing or new ones need to be introduced, just those parts can be replanned as necessary.
In fact, to budget any other way is both inefficient and detrimental to the running of the organization.
The next blog in this series will examine who should be involved in the planning process, and to what extent.