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September 25, 2000 |
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Budget Planning: The Next Generation
New applications open the process to more people and increase flexibility
By Rick Whiting
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or years, most companies have taken a rigid, centralized approach to budget planning and forecasting. So did the Soviet Union--and everyone knows how well centralized planning worked there.But businesses are making big changes in their budget planning and forecasting processes. Once carried out by a CFO and a few cloistered accountants, budget planning today is becoming more of a companywide effort, with a greater number of managers and employees contributing to the process. Many companies are striving to combine the traditional bottom-up approach to budget preparation, in which department heads submit budget requests that are rolled up into a corporate budget, with a top-down approach in which budgets are prepared in line with strategic objectives outlined by top management.
And while annual budgets were once as unchanging as a statue, more companies now view budgets as living documents that are revised on an ongoing basis throughout the year.
Financial executives hope these changes will speed up the laborious budget-preparation process and provide budgets that more accurately reflect a company's finances and goals. "A shorter process and more information--that's what we're looking for," says Art Lorenz, planning and analysis director at Hunter Douglas N.V., a manufacturer of window coverings and home-decor products with U.S. headquarters in Upper Saddle River, N.J.
Such demands are fueling--and being fueled by--a wave of new or enhanced budget planning and forecasting applications:
PeopleSoft, for example, is developing budget-planning software for commercial businesses based on technology it acquired in May when it bought Advanced Planning Solutions Inc. When combined with the budgeting functions already in PeopleSoft Financials, the new software will provide companies with both top-down and bottom-up budgeting capabilities, says Chuck Teller, general manager of enterprise performance management products at PeopleSoft.
Most companies now rely on Microsoft's Excel spreadsheet application as a mainstay for budget planning and forecasting, either exclusively or as a supplement to centralized budget-planning and forecasting tools. But preparing budgets with spreadsheets is a fractured process that makes it difficult for managers to get a solid grip on their company's finances. It also makes budget planning a lengthy, error-prone chore, as finance managers and controllers laboriously piece together budget requests and other data submitted by department heads and operating unit managers.
The painstakingly slow process of preparing a budget can no longer keep up with the needs of companies operating amidst rapidly changing business conditions. And Wall Street is quick to punish the stock of any company with errant financial forecasts. "Being able to predict performance is becoming much more important," says Gary Simon, head of financial solutions at Deloitte & Touche in London, which is using Comshare budgeting software to help clients do just that.
Many companies are moving to strategic, or top-down, planning. "A lot of organizations want to go to the next level," says Lee Geishecker, a Gartner Group research director. "The idea is that they'll be able to measure results more accurately. They will be able to answer the question 'How are we doing?' in a more timely manner."
Strategic planning means adopting new budgeting and forecasting processes and practices. While budget planning usually starts with the previous year's numbers, strategic budget planning begins with the organization's objectives--say, increasing sales 10%--and then building a budget designed to achieve those goals. "People are using budgets more for planning and control, and to tie the budget back to actual results," says Madan Sheina, a senior analyst with the Aberdeen Group.
But for strategic planning to work, input is needed from a wider range of contributors than have traditionally been involved in budget planning. Finance executives and controllers need information from departmental and line-of-business managers to determine what it will take to meet corporate objectives. How many additional salespeople, for example, will the company need to hire to increase sales by 10%?
Financial controllers also need to ensure that departmental-level budgets are being developed using the same assumptions, such as inflation projections and revenue growth, as the corporate budget is based on. That means finance executives need to provide departmental managers with guidelines and other data needed for preparing budget requests.
This is where the new generation of budget-planning software comes into play. Vendors are debuting new online budget-planning applications and Web-enabling old ones. Finance executives and department heads can easily access the same application, a major improvement over the current practice of E-mailing spreadsheets back and forth. Top management can provide department heads with budget guidelines, while departmental managers can enter budget requests directly into the application. "The goal is to precipitate wider participation in the budgeting process," says Aberdeen Group's Sheina.
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Photo of Lorenz by Chriss Wade
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