Taking the pain out of annual budgeting

For many Asian companies the creation of the annual plan or budget is a major event that consumes significant time and resource across the organisation, particularly in finance.

Numerous studies have indicated that this once a year process typically takes 3 or 4 months to complete. In terms of people’s time, the cost of the budgeting exercise often runs into hundreds of thousands of dollars.

The budgeting process typically commences somewhere between the middle and fourth quarter of the financial year when the company leadership team asks sales and marketing to forecast demand for the next financial year. These forecasts are then passed on to supply, who prepare expense and capital plans; at the same time, the supporting functions prepare their plans. Finance then pulls the disparate elements of the budget together to form an overall plan, which is presented to the leadership team who usually reject it as ‘not enough’ or ‘too costly’ and direct them to ‘try again’.

At this stage, with the start of the new financial year looming, the process descends into an atmosphere of crisis management. Sales and marketing rework their forecast adding lower probability or completely speculative opportunities (with little or no associated action plans), to increase sales revenue; whilst the supply team and supporting functions ‘take a razor’ to their expenses, again often with little change to the supporting assumptions. The process is repeated until the overall company plan achieves what the leadership had in mind at the beginning of the process. In multinational or global organisations this process can be played out multiple times as approval is sought at local, regional and global level.

The unfortunate outcome of all this work and expense is a team that no longer wants to take ownership of the budget, as their bottom-up plans have been manipulated, sometimes with little input from the team itself, in order to meet a top-down requirement. Moreover, in today’s fast-paced business environment, the budget is often out of date before it’s even published. Is it really worth all this effort to produce a plan that is old before you begin?
A number of companies are overcoming this issue and taking the pain out of the annual budgeting process by using a process known as Integrated Business Planning (IBP). A monthly, rather than annual process, IBP aligns the strategic and tactical plans every month from each individual business function to form one integrated, current operating plan. Not only does this allow senior management to effectively make decisions and allocate critical resources – people, equipment, inventory, materials, time and money – the process also provides a 24-month rolling horizon and bottom-up realistic plan. This ensures early focus on any potential gaps in business performance against targets, business plans, goals and strategic plans, allowing the organisation to predict and respond positively to changing conditions, in plenty of time.

Organisations that have successfully adopted IBP find at budget time they are able to use the Integrated Business Plan as their starting point for the next financial year. Moreover, by the fourth quarter of the current financial year they will have seen the business plans for the next financial year nine times already. This familiarity with the integrated plan and the detailed action plans and assumptions that underpin it, as well as any resulting gaps between strategic targets and the latest estimates, removes a lot of the guesswork from the annual budgeting process. Thus eradicating a lot of the cost and stress from the process and reducing the burden on the finance department.

The IBP process also allows for more robust plans. Having lessened the amount of work involved, the budgeting process can commence closer to the start of the next financial year, reducing the level of uncertainty. Additionally, successful IBP processes result in plans that include multiple sets of scenarios and contingency plans, based on opportunities and vulnerabilities, to ensure the organisation is prepared for whatever the future holds.

Companies can take a lot of the pain out of the annual budgeting process, by bolstering it with a monthly planning process, such as IBP. As well as ensuring the organisation is prepared for the challenges ahead, it will provide a realistic view of future performance to stakeholders and shareholders, and more importantly a valid and achievable plan - a vital element in eliminating the pain resulting from not meeting an unrealistic annual budget.

Stuart Harman, Partner, Oliver Wight