Simplifying Budgeting and Planning is FP&A’s Mission

From an organizational perspective, I have commented in the past that financial planning and analysis (FP&A) groups need to evaluate their mission and potentially redefine it to take advantage of what’s now possible with practical and affordable technology. Instead of playing a relatively narrow role in orchestrating the company-wide budget and periodic analyses and reforecasts, FP&A should recast itself in an advisory role designed to support the rest of the organization. To facilitate the planning process, support high participation and shorten planning and budgeting cycles, FP&A must design and implement streamlined processes that reduce the time required to create and update plans and budgets and enable a structured dialog about them. By 2025, one-fourth of FP&A organizations will have implemented IBP to improve the business value of planning and budgeting.

For as long as I can remember, people have been complaining about their company’s budgeting process. Our Business Planning Benchmark Research finds that fewer than one-half of participants said their company performs its budgeting and planning processes well. On the surface, this is puzzling because technology has made the mechanics of planning and budgeting more efficient. Yet one of the consistent complaints from budget owners is that the process provides little value to them. In their eyes, there is a long list of things that are wrong. Almost two-thirds of those participating in our research reported that it takes too long. Almost one-half said it is not adaptable or flexible enough, it is too political and, in the end, it is perceived as senior management’s budget or the finance department’s budget.

Lately, I have been thinking more broadly about the mission of the FP&A group, looking at it from an outside-in perspective. Beyond FP&A’s traditional role as the corporate middle-manager tasked with executing the budget process and providing financial and management data and analyses to the company, the group’s mission ought to be about serving the budget owner. That is, having planning and budgeting processes that create business value for the budget owner and senior executives as well.

Even when companies adopt dedicated planning and budgeting software, the budget owners — and others outside of the finance department who are involved in the process — often still are not happy. That is mainly because technology has not increased the business value of budgeting, especially to the budget owners and the executives who manage them. Technology helps the CFO and FP&A organization create planning models, produce a detailed budget and analyze “the numbers” with less effort than was required in the past. That is important, but it is not enough.

To make budgeting more valuable to running an organization, FP&A must also model and measure the “things,” or resources, that budget owners use to achieve their business objectives, not just calculate their monetary value. When budget owners plan and budget, they usually think in terms of the things they need to run their part of the organization, such as headcount, advertising campaigns, facilities, laptops and other items. The budgeting system must be able to simultaneously translate this list of resources into accounting line items so the system can aggregate the financial data into an organization-wide budget and financial forecast.

Starting with a list of resources simplifies the process for budget owners; it is a user-friendly approach to budgeting. It lets budget owners think the way they do about their part of the effort — focusing on the things they need — but also enables them to quickly and accurately translate that list into a financial budget to address the needs of the finance department. It is a simple idea, but it takes technology — the right technology — to make it feasible.

Headcount is a good example of how this works. Say a department head plans to keep his or her existing personnel but wants to add a couple more positions during the year to meet the growth plan outlined by the senior leadership team. Rather than scratching around for the right number, the department head builds a headcount plan using a list of existing employees. The budget owner connects this list to the related cost data, such as salaries and benefit costs, and then adds two hires in generic roles. Pay and benefit data supplied by human resources instantly turns that headcount plan into a headcount budget.

So, when it comes time to negotiate the department’s budget, the discussion is not about abstract numbers in a spreadsheet, it is about whether the department needs to add people to handle the increased workload or if, recognizing financial constraints, it can get by without adding one of those positions — or if it could wait until late in the year to add that individual.

The travel budget offers another example. The discussion about this allocation should not only revolve around the cost but also the number of business trips. Is the number too low or too high to achieve the department’s business objectives? Or, in the case of marketing, a results-focused discussion should examine how many leads are needed to achieve sales objectives and how much these will cost — not just fixated on the cost alone.

Creating budgets and plans expressed as things, not just money, also means that as the year progresses, the FP&A group will be able to analyze whether variances were the result of the things that were different or if the costs were different. In other words, it will highlight whether the headcount expense variance is the result of higher-than-expected benefits expenses or because the number of employees is different than was outlined. This approach can speed up the budget process and focuses the discussion in budgets and reviews on business issues and objectives, not just the financial plan. Rather than requiring budget owners to tediously construct a fiscal budget for each of the line items, it is more productive to have them focus on their business objectives and then plan the resources required to achieve them.

Unfortunately, our research finds that 65% of companies use spreadsheets for budgeting. Dedicated planning and budgeting software can be designed to translate required resources into budget line items. This is not feasible using desktop spreadsheets for three reasons. One is that spreadsheets are two-dimensional grids that are well suited for working with accounting data but as a practical matter cannot work with things. Second, the process of aggregating data from multiple business units is too time consuming to be feasible. Third, it is too difficult to control access to sensitive information such as salary and headcount costs.

When budget owners use models to plan the things that they need to achieve their business objectives while leaving it to the software to translate those things into the budget, the finance department promotes a collaborative approach to planning and budgeting. Collaboration is essential for effective corporate planning and budgeting because it gets everyone onto the same page to ensure that their related activities are coordinated. Our research finds that almost all companies that collaborate effectively in their planning processes have a process that is well-managed. In contrast, just 11% of companies that do not collaborate effectively have a well-managed process.

Planning the resources needed to achieve business objectives in parallel with the budget necessary to acquire those resources increases the business value of the process. It shifts the discussion between executives and budget owners away from abstract financial numbers and back to the things the budget owners need to achieve their objectives. It delineates the things that the budget owner can control from the things he or she does not. For example, a budget containing resource requirements as well as costs focuses budget discussions on business issues, not just spending caps. Questions arise such as, what is the rationale behind cutting the department’s budget? Is it asking for too many people relative to the work that needs to be done? Are the corporate allocations higher than they should be? Are travel costs increasing faster than the value of an additional sales call?

Budget discussions about how best to adapt to spending constraints should focus on objectives and the resources needed to achieve them — not just abstract accounting numbers. The numbers are the guardrails, but plans that focus on “things” as well as finances also make performance assessments more insightful and useful. For example, if headcount costs turn out to be materially different than planned, a financially focused budget cannot easily determine if the difference was due to a misestimation of labor unit or benefit costs, a different mix of pay grades employed, or some combination of the three. Planning and tracking resources as well as money provides FP&A, budget owners and executives deeper insight into performance than numbers alone. Even if the actuals are in line with the budget, this might be the result of one factor temporarily cancelling out another, obscuring the need to revise estimates in future periods. Software that is designed to enable the business unit manager to plan the things the business needs as well as their budgetary impact is better able to quickly compare actual results to the original plan in parallel with the budget.

Another important benefit that companies can gain from switching from desktop spreadsheets to a dedicated planning and budgeting application is making planning and budgeting more useful for the budget owner. Increasing the business value of budgeting and planning for budget owners and executives should be a priority for FP&A organizations. Unfortunately, our Next-Generation Business Planning Research finds that 66% of companies use spreadsheets to manage their budgeting process. As noted, desktop spreadsheets have inherent deficiencies that make them unsuitable for the kind of budget owner-friendly budgeting outlined here. Dedicated planning and budgeting software is the right tool for the job. Dedicated software also can provide guidance during the planning and budgeting process as well as useful feedback as the planning period unfolds. It can do so using “things” (headcount, throughput, consumption) as well as money (budget accuracy, profitability) and KPIs (input-output ratios, not just money).

While I think that improving the operational value of planning and budgeting would be a boon to any organization, I am not convinced the impetus to overcome inertia is there: By 2024, just 1 in 5 FP&A organizations will have redefined their mission to make planning easier for business unit leaders. Those that do will be a strategic asset. Financial planning and analysis leaders who want to take their organization to the next level should begin to think about the process from the outside in. Putting the A back into FP&A is a good first step but to increase the department’s strategic value, it is necessary to make planning and budgeting a more useful tool for the business. Companies using dedicated software for budgeting and planning should examine how the software they use can better serve budget owners. Those using desktop spreadsheets to manage the budgeting process should move to a dedicated planning solution to make the FP&A organization more productive and consider how dedicated software, not spreadsheets, can make the process a more useful business tool for their budget owners and executives.

Regards,

Robert Kugel