The Devil in the Details
“Excel is the best modeling tool on the planet,” says Thomas Malone of SRC Software, but as a collaborative database and reporting tool, it falls short.” Malone, the CEO of the budgeting and planning software provider, notes that battle-tested real-time B&P software “has only been available for the last four or five years, and companies are not aware of its practical capabilities.”
Perhaps dread, rather than lack of awareness, is the largest reason that managers have avoided rolling budgets, muses Malone’s colleague Philip Sandstrom. Many managers believe that rolling budgets require the same level of detail as annual budgets, says Sandstrom, SRC’s finance chief, and they’ve been scared away by the thought of tackling this beastly project more than once a year.
To help managers conquer this fear, says Sandstrom, top management “has to make it clear that rolling budgets require only summary information” — say, at the district level, not the cost-center level. The goal is to give managers a big-picture view of short-term performance. Line managers should pass along material operational details to the CFO, notes Sandstrom, but many of the minutiae don’t need to be shoehorned into a rolling budget.
Successful adoption of B&P technology often rides on “the philosophy of the plan,” says David Foley, senior director of financial planning at 24 Hour Fitness. “Does the rolling budget just look like support for the finance function, or can operational managers recognize the business value?”
Foley’s initial concern was to ensure that his regional budgets, which rolled up the profit-and-loss statements of more than 300 individual health clubs, reflected the way the retail outlets made money. For starters, Foley made sure his modified rolling budgets talked the talk of health clubs.
Instead of requiring managers to populate the system with price points handed down from the finance department, the budgets reflect the staffing hours and membership rates that are the life blood of each outlet. Every quarter, using performance management software from Longview Solutions, Foley rolls up the regional numbers to measure budget variances against corporate assumptions.
According to Foley, the company made a cultural adjustment by using technology to bridge the gap between finance and operations, and to eliminate the uneasiness that operations managers felt about building budgets. More important, managers can recognize the inherent business advantage in the new budgeting process. For example, they can more easily identify if a club is spending too many staff hours teaching low-revenue-producing group exercise classes and not enough time focusing on more-lucrative one-on-one personal training sessions.
Dispelling the fears and misconceptions of line managers is important to the adoption process, but it’s only a part of the reshaping of corporate culture, which is essential if rolling budgets are ever to take hold.
Key, of Lake Business Development, suggests starting the cultural revolution by deconstructing compensation plans to give line managers control over their goals. She suggests linking compensation to key performance indicators rather than top-line numbers, because revenue can spin out of control through no fault of the line manager. Witness the manager that receives a bonus based on business unit revenues, says Key. If the CEO decides to use that unit’s surplus to buy a new business, the manager has been set up to fail, and worse, forfeit the bonus.
However, getting beyond such legacy compensation schemes is easier said than done, admits Gregg Gracheck, product manager of FRx Software’s Forecaster tool. By his lights, drawing KPI into the process can pay off — provided that management figures out what the company should be measuring.
For example, if a company measures the rise and fall of market share as part of B&P, it should also take into account the cause of the fluctuation, then compensate managers based on how well they fix the root cause. For example, says Gracheck, market share often drops when customers are dissatisfied, so customer service managers might have incentives tied to raising the performance of their call centers.
The flip side, according to CODA’s Roche, is the frequently seen disconnect between line managers and the budget, in which a company may hit its quarterly revenue numbers but run expenses way over budget to do so. Roche blames that kind of practice on a corporate culture that “links bonuses to revenues and not performance.”
Management will also have to eliminate the “I have to spend” mindset before rolling budgets can take hold, asserts Andrew Kamlet, vice president of marketing for FRx. In most organizations, operations managers are forced to spend their entire budget in a given calendar year or risk losing it the next. In a company that’s serious about adopting a rolling budget, says Kamlet, time won’t run out; pending plans will be revised as quarters or months are rolled out, and managers will be able to plan more judiciously.