Quocirca's Straight Talking: Budgets made simple

The latest acronym in business applications - CPM - promises to make budgeting a bit less painful. Quocirca's Sharon Crawford asks whether this is too much to ask of any software.

More than 90 per cent of organisations perform some sort of annual budgeting process in order to set out targets and cost controls for the forthcoming financial year. Yet any conversation with or survey of managers, budget holders or staff controlled by budgets is littered with criticisms and frustrations of the process. Quocirca generally finds the following are high on the list:

• It takes too long
• It is spreadsheet hell
• It is a de-motivating activity
• There is no obvious link between the budgets and the operational targets
• It is hard to understand the rationale behind the figures

This does not appear to have changed over 20-plus years of evolving financial systems, from highly centralised mainframe systems through to today's decentralised, team-based systems. Despite many improvements to software aimed at making it easier and more accessible to those that have to contribute to the process, budgeting is still a resource-intensive and lengthy process.

Why is this?

There are dozens of vendors which provide software that claims to ease the budgeting and forecasting process. This includes vendors such as Business Objects, Cognos, Extensity (now part of Infor), Hyperion, Outlooksoft and SAS - many of whom, once primarily known for their business intelligence (BI) heritage, have extended their reach as providers of corporate performance management (CPM) suites.

CPM software aims to support speedier processes, greater visibility of the budget figures and ownerships, improved data quality and less budget gaming (negotiating artificially low revenue or high expense budgets in order to maximise bonuses).

Yet analyst figures estimate that 50 to 60 per cent of organisations still depend on spreadsheets for creating, monitoring and reforecasting performance against budgets. It could be the lack of uptake of CPM systems that sustains the budget inefficiencies - or it could be that CPM vendors need to improve integration between their products and Excel.

What is worrying is that many companies replacing spreadsheets are not reporting resource savings. A recent independent survey (sponsored by a CPM vendor) of 200 respondents from the largest 1,000 UK companies found slightly more time was required to perform full reforecasts for companies that used packaged budgeting applications. The vendor's interpretation was that "while they are removing spreadsheets they are failing to re-engineer their budgeting processes to leverage the real power of sophisticated software solutions".

This is the rub. How sophisticated should the budgeting process be? Are we talking about the annual budget - or are we talking about performance against targets? Can we use a single set of figures to control costs and drive performance improvements?

There are distinct differences here and it is in trying to use the annual budgeting process to move beyond budgeting that the frustrations arise. As software solutions and/or Excel budget models have become more sophisticated, there has been a tendency to try to link all operational metrics to a financial budget in a single model.

Budgeting thus becomes more detailed and we are encouraged by the power of the software and the messaging from performance management vendors to extend our budget models in this way. The resulting over-complex models slow down the budget process, increase user-frustration and take away from the benefits of using software in removing some of the difficulties associated with controlling spreadsheets.

The answer is to be clear about what the purpose of the budget is and to keep it simple.

Budgeting is about controlling the business and ensuring accuracy in forecasting financial performance - more important than ever in these days where compliance and responsibility to shareholders is uppermost in the finance director's mind. Budgets should be limited to and understood by all to be a set of controls. Successful organisations budget against 50 or less line items - rather than trying to reflect the full chart of accounts in their budgeting system - and have employees who understand the importance of adhering to the agreed budgets.

Planning for success is about setting operational targets, many of which are not directly measurable in financial line items - the language of budgeting solutions. Operational targets need their own language and types of metrics. Targets such as average monthly sales or minimum levels of customer satisfaction cannot be defined easily in a budgeting pack designed for financial reporting.

There is, of course, a need for managers to correlate operational targets against actual results and budgets in order to analyse cause and effect, ensure timely alerts and issue accurate profit predictions. However one thing is certain - cause and effect cannot be seen by simply using actual, budget variance financial reports.

So, can performance management software help?

Yes it can. Budgeting applications can definitely improve the life of the budget holder and the management team. Good budgeting applications provide automated and accurate consolidation as well as clear visibility and common understanding of the drivers and calculation models being used, removing the difficulties of maintaining independent spreadsheets.

In addition, performance management software can provide intuitive front ends for viewing and analysing figures - a boon for the many non-financial people who are responsible for budgets.

CPM suites will provide these financial budgeting aids together with BI tools, planning applications or specific strategy management software built with the understanding that the nature of performance metrics varies and includes detailed non-financial considerations.

Some advice for selecting budgeting software: concentrate on the aims of the budget process and the requirements of the budget holder. Look for the overall reach of the solution through budgeting, target setting, correlation, reporting and visualisation but try not to get carried away by vendor vision that will not be practical to implement. Good performance management solutions will address correlation but won't try to force building all measures into one complex model.

But more than anything, create a business environment where performance reviews combine budgetary adherence and the achievement of non-financial targets. Frustrations with the annual budgeting process will be reduced by accepting that budgeting and operational planning address two different but complementary approaches to controlling and driving business success.