Evolving Financial Planning & Analysis: Should the Budget be Abandoned?

“The same companies that vow to respond quickly to market shifts cling to budgeting – a process that slows the response to market developments until it is too late.”                                            -Jeremy Hope and Robin Fraser,                  co-founders of BBRT

With analytical driver-based models, FP&A’s processes become more flexible and dynamic. A new generation of systems allows for agility, easy management of FP&A routines and collaborative planning. FP&A systems are now more often managed in the finance department, which helps to eliminate the problems of ‘black boxes’ and heavy reliance on expensive programmers and IT departments.

Today, we are seeing the emergence of a new generation of FP&A professionals, who are different from traditional accountants. These practitioners can see the big picture, understand key business drivers, build models and generate valuable business insights. Most importantly, they can communicate the insight for effective decision-making and also inspire people across the organisation.

The basis for this evolution is a changing business culture. The traditional, outdated budgeting mentality is being challenged more and more. Target negotiations, political games and biased planning processes cost companies a lot of money. These traditional budgeting practices are non-value adding and need to be abandoned if organisations want to stay competitive in this dynamic business environment.

While the process of moving away from a traditional budgeting mentality is painful and slow, it is happening around the globe. The question is, are we ready to abandon the traditional budget completely?

Going Beyond Budgeting

The proponents of the ‘beyond budgeting’ movement are convinced that the budget attempts to fill too many roles, namely:

•  Setting targets.
•  Planning.
•  Resource allocation.
•  Coordination.
•  Performance management.

One of the biggest conflicts of interest lies in trying to combine planning with target negotiations. It is a well-known paradigm: the budgeting process is a process of heavy target negotiations. Targets are linked to remunerations. This makes traditional budgeting a very emotional process: it is a battle for next year’s pay package of the participants. Can it still be objective and unbiased? Probably not.

This is a game, where ‘subjective’ or ‘objective’ are often forgotten. When this subject is discussed at FP&A Club events in different countries, it invariably produces smiles on FP&A professionals’ faces. They can strongly relate this behaviour to inefficiencies in their processes. Unfortunately, this traditional process is still so heavily embedded in business practices around the globe that often it is very difficult to challenge the status quo.

Luckily, change is already underway. More and more, companies are realising that budgeting is out-of-date before its finalisation and, therefore, is not that relevant for business.

Some companies have even started to think about abandoning the budgeting process altogether. Norway’s StatOil and Sweden’s Handelsbanken are among those to have done so, demonstrating that it is possible to survive and prosper without a budget.

However, this cannot happen overnight. Going beyond budgeting requires serious changes in business culture. It is well-known that such changes are the slowest and most painful.

What is Beyond Budgeting?

Bjarte Bogsnes, vice president, performance management development of StatOil, defines beyond budgeting thus: “The main purpose is liberation from dictatorship, micromanagement, number worshiping, calendar periods, hierarchies, secrecy, stick and carrot.”

The main problems of traditional budgeting may be summarised as follows:

• Planning and forecasting are mixed with the target setting process.
• Compensation targets are fixed and heavily negotiated during the planning and budgeting process.
• Budgeting for the year is fixed. It is perceived as the head of each department’s annual allowance. If he/she does not spend this year, that budget can be cut next year.
• The capital budget is set during the budgeting process. It is often fixed for the next financial year (in both projects and money terms). If you see an interesting business opportunity during the year, it may be not considered at all if you do not have the budget for this new project.

Looking at the problems of traditional budgeting, many realise that it does not fit for purpose. Are we ready to abandon it though?

Many FP&A professionals find the idea of abandoning the budget difficult to comprehend. Typical responses include:

•  How will we report to the market analysts?
•  How will we compensate our sales force?
•  How will we control our expenses?

The reality is that the beyond budgeting philosophy does not leave an empty space. Once the budget has been abandoned it gives new management tools that allow companies to overcome inefficiencies and a culture of dysfunctional behaviour.

Beyond Budgeting, Step-by-Step

Basically, the first step should involve separating the three processes that are historically combined in the traditional budgeting routine; namely target, forecast and resource allocation.

The next step should consist of improving each of these processes:

• The target should become more ambitious, but relative. For example, it should be connected to external industry benchmarks. Fixed targets do not support holistic performance management practices.
• The forecast should be driver based and analytical, assumptions should be logical. Only a logical, analytical process can help create an unbiased planning and forecasting process.
• Resource allocation should be flexible, not fixed. If a new opportunity arises during the year, it should not be killed because of the lack of capital budgeting.

The instruments of beyond budgeting are different. In general, it is based on rolling forecasts, balanced scorecards, analytical driver-based models, modern FP&A systems and efficient FP&A departments.

Above all, the most important factor for beyond budgeting is business culture. While some organisations are not yet ready for this change, they may well become so over time and the process will be evolutional.

Many companies are currently in a stage of transition: deeply dissatisfied with their FP&A processes, overworked and bombarded by deadlines, and looking for new FP&A talents that can be difficult to find. They are beginning to take the first positive steps towards a better FP&A business culture: implementing rolling forecasts, driver-based models and modern FP&A systems.

However, the culture is often driven from the top of the organisation. Chief financial officers (CFOs) and chief executives (CEOs) have lived with budgets for too many years.

The simple test in order to understand how embedded the "traditional budgeting culture" in your processes  is to ask your FP&A team the following questions:

• Are you ready to challenge your CFO/CEO, when he/she sets unrealistic targets? Are you ready to point out when a plan is biased and not in-line with the trends and driver-based models you have?
• Do you have enough courage and power to eliminate ‘hockey-stick forecasts’ in your company, which often demonstrate how unrealistic and biased the process is?

If you can answer ‘yes’ to the above questions, then probably you are ready for the beyond budgeting journey.

If not, good luck in your search. Please remember though that if you want your FP&A department to become more strategic and influential, you have to challenge the existing status quo.

? 2016 Larysa Melnychuk, All Rights Reserved

This article was first published on

https://www.gtnews.com and https://www.afponline.org/

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