In this series of blogs we have been covering the different stages of budget maturity. So far we have seen the characteristics of organizations that run budgeting as a head office exercise, as a departmental exercise, and with an enterprise focus. We looked at the pros and cons of each with suggestions on how they can be improved. In this blog I’m going to look at the most mature stage of budgeting, which is when it is run as a continuous exercise, driven by exceptions and events.
Given that most organizations spend between 3 – 4 months in setting a budget, it’s obvious that to do continuous budgeting, something has to change. One of those changes has to be to rid the process of game playing, and where the budgets being set are based on reality. It also means that the time horizon in which budgets are set will be dependent on the industry and how fast it changes. There’s no point in assigning resources that are then set in stone, when we have no idea of what the market is going to look like at that time. Given the limitations of what can be described in this blog, I’m going to have to provide a series of bullet points of the characteristics of this approach to budgeting. I have a book coming out in February 2014 where the approach is described in a lot more detail. You can review the content and its publication date on the site www.businessplanningframework.com. A continuous budgeting approach is characterised by:
- Budgets being split into ‘Business as Usual’ and strategic initiatives - see my blog on Moving towards continuous planning for more information)
- Resources are linked to the amount of activity being carried out by a department so they can be assessed for value and change over time.
- ‘Business as usual’ budgets are generated by drivers on a continuous rolling forecast basis. i.e. this can be automated based on the perceived links between activity and costs.
- ‘Initiatives’ are planned and monitored as discreet projects. They are planned ‘as required’ and can be started and stopped at any time depending on results being forecast.
- The impact on activities on organizational outcomes is continually monitored. If something happens to disrupt those outcomes – e.g. a competitor undercuts prices, energy prices rise faster than expected, then activities will need to be revisited and re-planned as necessary.
The pro’s of this approach means that less time is spent on guessing numbers. Driver based budgeting is based on facts that can easily be proved leaving less room for game playing. Initiatives have a direct link to corporate objectives, so that management attention is focused on activities and how they related to overall goals.
The con’s are that it may require a radical rethink of what planning means and how it is conducted. It may also mean an investment in modern planning technologies. But without these changes, budgeting will remain an ineffective management tool. I hope this series of short blogs have been helpful. If I can be of use to your organization in improving its budgeting maturity, then do get in contact by using the following form. Michael Coveney