The Pain of Budgeting

Last week, I was in Nashville at the Association for Financial Professionals (AFP) conference. Nearly 7,000 people from across the country attended to try to get more from their FP&A, treasury, payments, and banking processes.

The expo hall attracts hundreds of vendors who are there to show off their newest capabilities. Treasury and FP&A software platforms, with the support of venture capital and private equity partners, have pumped billions of dollars of funding into capabilities that promise to make life easier for millions of finance people across the globe. Many of the solutions are great. Many aren't.

Despite my relationships throughout this industry, it's impossible for me or anyone to know what's going on in every corner of it. That's particularly true of so many developments taking place behind closed doors, only being revealed for the first time during demos at conferences like these.

That's why it's my goal to go and hear and see what I haven't experienced in my own work with a limited number of clients. I hope to see solutions and hear stories about what other companies are doing that I'm not or haven't even considered.

What my session on driver-based planning and forecasting revealed about corporate budgeting

On Monday morning, I was tapped to deliver an educational session on driver-based planning and forecasting. I was taken aback by the number of people who attended. Every seat was taken and people were standing around the perimeter of the walls.

When I asked how many people were involved in budgeting this time of year, most of the hands went up. When I asked how many people were using the sophisticated tools being promoted in the expo hall, very few hands went up. When I asked how many people were using Excel or Google Sheets for their company budgeting, probably 98% of the hands went back up.

Despite all the great planning, consolidation, and EPM tools available, many companies—particularly those that are mid-sized or smaller—are still doing planning the old-fashioned way. They extract data from their back-end ERP and accounting systems, put together their 12-month actuals from the prior year, review last year's budget, and get to work inside their spreadsheets.

It can be a headache. Some FP&As take a few weeks to get the job done. Others spend upwards of 4-6 months putting together sophisticated schedules that require constant updates and reconciliations.

When I delivered my session, I highlighted the importance of building uniform templates, formula-based forecasting methods, flexible formulas, and recurring data imports. The goal of forecasting isn't merely to put together a forward-looking strategic plan—the goal is to better understand the business drivers and stitch together a process that takes the pain out of bringing in actuals, rolling forecasts forward, and adds greater confidence for the people involved.

It doesn't really matter whether it's being done in a sophisticated and expensive planning tool or whether it's being managed more granularly in Excel. Forecasting methods can work either way.

Why is Budgeting so Painful?

Even outside of the AFP conference in Nashville, around this time of year, I usually get emails from strangers, workshop attendees, and former clients about the pain that is their budgeting process. A distraction from their normal, everyday work, budgeting sucks up their time and attention.

For non-financial people, burdened with the accountability put forth by FP&As, Controllers, and CFOs, it can lead to a desire to do whatever it takes to get the finance person out of their face.

Because it requires cross-collaborative effort and coordination across the company, the frustration can bring about simple roll-forwards from prior year and prior quarter figures, sandbagged numbers, and missed deadlines to submit departmental templates.

Budgets can be a disastrous process. And because they can be a disaster, lots of people hate going through the process of creating them, managing them, and rolling them. But if budgets are built well and the process is templatized, budgeting season doesn't have to hurt.

How to put together the framework for a good budgeting process

When I help companies build their budgeting and rolling forecast process, it starts with the same 9-step framework. Whether the company keeps it static or rolls it forward is completely up to the people in the finance and accounting functions.

1) Identify the Objective or Mandate

If you've worked or trained with me before, in almost any context, I almost always start at the highest level of understanding of what we're trying to do. Budgets shouldn't just be done because we've always done them. They're not just simply a collection of Excel spreadsheets that we freeze in December because the CFO asked for them.

No, they should be done to assist with certain elements of planning—or possibly most core elements of planning. Within context, budgets serve as tools that offer us aid. They're not merely deliverables.

Once we're clear on the point of the budget or planning process, that offers the framework we work within.

2) Verify Accessibility, Timeliness, Accuracy, and Relevance of Data Sources

I've had budgeting and planning conversations with tiny companies and giant banks and lots of middle-market companies in between.

I hate to say this, but within this 9-step framework, step 2 is where most companies get stuck—companies large and small. This is often why many finance and accounting professionals end up walking the expo halls at finance and accounting conferences, looking for solutions.

The data is a mess, the complexity of the process is horrendous, and budgeting is painful. When the data is a mess and hard to clean, the rest of the budgeting and planning process gets bottlenecked.

So there are a few choices here. Either the data can be retroactively fixed, new systems can be put in place to effect a smoother process going forward, or both. But do note that the steps that follow step 2 are all dependent on the quality of information going through the process. If there's bad information, everything else either becomes compromised or needs to be based more on subjective assumptions rather than objective data.

3) Identify contributors and establish protocol for accountability

At the conclusion of my first session at AFP, I made a statement that I felt was accurate, albeit a bit contrarian. With FP&As, Controllers, and CFOs in the audience, I said they aren't responsible for the budget. I shared the example of a large telecom company where, among the 30 key players involved in the planning process, only a few were in finance. Everyone else was a non-financial department head. THOSE leaders were responsible for the business unit budgets. It was the responsibility of FP&A for challenging them, bringing them together as part of a recurring process, and coordinating the larger effort.

That's the key to making budgeting less painful. It's not finance that runs the show. It's finance that supports the business units in their own planning. And when those budgets get brought together at the consolidated level, FP&A can then go back to the departments with further aid. In fact, in many large corporations, FP&A is actually entrenched within the business units, forming a direct line-of-sight from the business unit to the HQ.

At mid-sized and smaller companies, there may not be the human resources or complexity to warrant putting FP&A people at the business unit level. But nevertheless, developing a budgeting process whereby departments own their budgets and receive the assistance of finance is a key to making the process far less painful.

What Questions Do You Have?

If I'm getting messages from people who are struggling with the budgeting process, I assume you may be, too. What questions do you have that I might be able to help with? Or what questions do you have that you'd like to see me address in a future newsletter?

I'll continue sharing my thoughts and recommendations for the remaining budgeting and rolling forecast framework in a forthcoming release of The Statement. Stay tuned.

Until next time,

Carl

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