Last week, AFP conducted a webinar with three FP&A experts to discuss the results of the 2017 FP&A survey, How Relevant is Your Budget? The webinar helped interpret some contradictory survey results by showing that the budget process both shapes and reflects the organizational culture in which it operates.
The survey had several surprising findings: Despite years of complaints and consultant recommendations, the budget lives at companies as an engrained part of management efforts. Fully 90 percent of senior management are frequent users of the budget, according to the survey, and 82 percent of CEOs find it useful or very useful. Furthermore, whether people used the budget process more or less intensely, or more or less rigidly, had little impact on their view towards its effectiveness or importance. Budgets are widely used and referenced throughout the year.
How could the budget be so diversely applied? How can it be so prevalent and hated at the same time?
The first insight came from webinar panelist Pete Geiler, FP&A, whose work experience includes a start-up, a large healthcare company, and now a nonprofit. Each of these organizations had a different approach to budgets; he recently had to justify in detail a 0.4 percent budget savings to a federal government agency.
Reflection 1: Monitoring Financial Performance
When pressed on the usage of budgets versus other relative benchmarks such as prior years, a recent forecast, or peer groupings, Geiler said that the use of the budgets is less important than the discipline of financial review. “The budget is just one of many tools to predict the future or set a course,” he told webinar attendees. “The more important part is consistent monitoring of financial performance and forecasting.” Thus, FP&A and the budget process play a role in creating a culture of fiscal discipline and accountability for the organization.
How the enterprise accomplishes this review is a cultural issue and may reflect various constraints, such as government regulation (as with Geiler’s current employer), board of directors, or private ownership. The complexity of the company also governs the process, as heavily matrixed companies or larger companies will have more reviews, and more ways to cut and analyze the data in the review.
Once the budget is complete, most companies enforce that discipline with a series of periodic performance review meetings. From the survey, more than 80 percent of organizations hold monthly or quarterly performance review meetings, indicating a need for financial and operational accountability. The budget dominates these meetings, with additional time given to operational metrics, and comparisons to forecast and prior year.
Reflection 2: Applying the Budget
The application of the budget also is a function of culture. Jill Bowman, FP&A, stressed to webinar attendees that finance professionals need to “be aware of how [the] budget process impacts the behavior of people in the organization.” She works for a healthcare company where they set a budget, but then trust their clinicians to make the right medical choice for the patients even if that means contradicting the financial guidelines. This focus on providing value for the patients and willingness to discuss variations helps to shift the focus of the budget on optimizing resources and preventing unhealthy behaviors, such as hoarding or interdepartmental sabotage.
Bowman explained that, “Budget variances must be explained. Variances are mostly treated as opportunities for learning and communication. If variances reveal that there were errors in judgment made, senior management may decide that there need to be consequences, on a case by case basis.” The organizational culture takeaway: We trust you to make the right business and client decision, and will accept budget variance.
Stacy Cunningham, VP Financial Planning and Investor Relations at Gannett, noted that her company is undergoing a cultural change, including the integration of a couple digital companies that are more accustomed to less structured operational environments. “Gannett is really trying to transform its culture—transitioning from a traditional media company to a digital media company, so we have a lot of change happening,” she said. This has led to a budgeting process that is more streamlined and faster than what Gannett had used in previous decades, reflecting the quickly changing industry trends —although it does face some resistance from people who are used to “the way it has always been done.”
Reflection 3: Including Stakeholders
This led to another insight about culture and the budget that Cunningham emphasized: Be inclusive in the process and set expectations from the start. This simple idea has several sub-components. It is useful to explain the process to all contributors and set expectations for the level of effort and detail, especially for newly acquired businesses. There is no substitute for working closely with business partners and helping them understand their models, drivers, and perhaps even including the last mile of entering the information into the consolidation tool.
Another inclusive process is to have senior leadership, in meetings with the board and shareholders, share the high-level goal of where the budget numbers should end up. It is very frustrating for the company to complete a bottoms-up projection and find out that it misses the mark and must start over.
The webinar panelists confirmed other survey findings—that the budget process suffers from high levels of effort, long planning periods, and loss of relevance as the year continues on. But the relationship to company culture is an importance nuance. It is important because it is one method for creating fiscal control and discipline, it impacts the behavior of individuals, and it works best through collaboration. The fact that it is so entrenched is a major reason to make sure we get it right.