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  • CFO Europe Magazine

Rolling Along

Many finance chiefs aspire to a dynamic budget, but most companies ''just aren't planning and measuring the right things.''

The economic downturn is partly to blame for backtracking on efforts to bin the annual budget, says Bernd Gaiser, Stuttgart-based CEO of Horvath. During the go-go days of the late 1990s, companies felt the need to streamline and speed up planning to keep pace with their changing markets. But as the economy worsened, projects to abandon the annual budget were….well, abandoned.

“Companies went straight into cost-cutting environments and senior executives wanted to keep an eye on every detail of spending rather than focusing on high-level items,” says Gaiser. That meant many companies reverted to old habits that bog down budgeting.

Analyse This

Research from The Hackett Group, an Ohio-based business advisory firm, shows clearly that better companies have less complicated, more streamlined budgeting. Benchmarking European and US firms, The Hackett Group found that companies in the second quartile have an average of 200 line items in their budgets and need 100 days each year to complete them, while top finance organisations average 70 line items and need only 79 days. (See the tables at the end of this article.) Firms in the second quartile also were less likely than world-class companies to have a central data repository to generate business performance reports, and were unlikely to have fully integrated budgeting and planning applications.

Yet for all its flaws, many finance chiefs like the discipline of the annual budget. “I’m not a believer in binning the budget,” says Peter Sands, group finance director of Standard Chartered Bank, a $4.75 billion (€3.85 billion), London- and Hong Kong-listed bank. The annual budget “is really a way for us to take stock every year of what we’re doing,” he says. It’s also a way to gauge external expectations. More and more, Sands says, the bank asks analysts what their expectations are for the next year.

“That helps us build up the external context for our broader strategic objective … before head office sets the key financial parameters and the framework for the business units to deliver the numbers,” says Sands.

That kind of external information could be a welcome addition at many companies struggling to build a link between their strategic vision and their budgets. Indeed, cases abound of boards communicating plans to shareholders that are completely divorced from the financial budgets to which the rest of their companies are working.

Still, since becoming CFO in 2002, Sands has made efforts to streamline the budget process. He has reduced the amount of time it takes to prepare the budget to around two months, and says that budgeting “has become a process that we consciously manage heavily.” And to stay on top of the numbers throughout the year, he also requires the business units to prepare quarterly rolling forecasts that look six to eight quarters into the future.

From the Top

It’s usually the flow of information internally, rather than externally, that needs improving. What a lot of companies don’t understand is that “a budget goes deep into how a company is managed,” says Gaiser of Horvath. Improving the budgeting process requires a big shift in management control to drive budget responsibility far down into an organisation.

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