“Not to beat around the bush, but the budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, time, fun, and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity. In fact, when companies win, in most cases it is despite their budgets, not because of them.” – Jack Welch, former Chairman and CEO of General Electric
That is a pretty strong statement, but I bet many of you are smiling. You know, that uncomfortable smile you make when someone says something that hits a little too close to home. As an FP&A guy who has spent plenty of time building those budgets he’s talking about, that quote certainly speaks to me. He makes some great points though. Despite that, budgeting is still deeply embedded in our corporate culture. As you embark on the 2020 planning season, this is a good opportunity to rethink your process. Let’s examine a few of the problems with traditional budgeting.
Time Consuming and Costly
I’m preaching to the choir on this one. You know how much time and effort is spent on the budgeting process. There are typically multiple passes that include all levels of the organization, presentations to senior management where we “defend” our budget, and the thought that more is somehow better. More schedules, more pages in the deck, more passes, more reviews. It’s maddening. We capture more detail than anyone could possibly know in the future and many of us still compile it using Excel (don’t get me started on that one…). It is difficult to get timely information that you can use to help build a reasonable budget.
Quickly Irrelevant and Outdated
Do you make it through half of the plan year with a relevant business plan still? If so, you are in the minority. I used to feel as if I was just going through the motions knowing that as soon as it was finalized, it was useless. It simply became a method to determine my bonus, not a method for driving the business forward.
Business Finance conducted a survey several years ago and they asked respondents to tell them when their current year’s budget became outdated. Based on my experience, these numbers still hold true. Take a look at the responses:
28%: Before the plan year begins
48%: 1-3 months in
67%: 4-6 months in
70-75%: Before 2nd half of year
What are doing? Why do we continue this process?
Financial Process Largely Disconnected from Specific Drivers
How often are you building your plan with driver-based accounts? Are you starting with your line/operation managers and asking them what they can actually achieve next year? If you are, great! What I often see, however, is a disconnect between the P&L, oftentimes created in a vacuum, and operations. We talk about our plan in terms of YoY growth rather than focusing on the macro and micro indicators that surround us today. We build plans with months and quarters in mind while the business may be run by weeks or days or cycles. If you aren’t focusing on the specific drivers of your business, you risk creating an unattainable plan and you will spend the entire year making up variance analysis comments.
There are several other challenges with traditional budgeting that I’ll discuss in my next blog. Then, we will talk about alternatives to this and what our next steps can be. For now, just know that we can help show you another way. Decide right now that this will be the last traditional budget you do. 2020 is it! Give us a call. We’re here to help.