“It’s the most wonderful time of the year … with gay happy meetings … marshmallows for toasting … scary ghost stories and tales of the glories …”
Andy Williams was not entrenched in a large corporation when he crooned this famed Christmas ballad. The traditional corporate march to create a budget during the holidays is a far cry from happy meetings when friends come to call. However, there are scary ghost stories of former executives failing to meet operational budgets in years past. As the budget meetings conclude, management feels like marshmallows for toasting.
The budgeting, planning, and forecasting process should not be a corporate nuisance. Planning is when management has a chance to get away from the mundane day-to-day activities, think about the future, and make resolutions for the new year. Yet budgeting has become an annoyance. Why?
Many organizations have overly complicated the budgeting process and fail to see budgeting, planning, and forecasting as a simple, integrated process. Organizations spend more time doubling planning efforts with department heads second guessing each other’s numbers and assumptions. The planning department ends up patching together a consolidated budget.
Budgeting becomes nothing more than a corporate hammer used to intimidate middle management into submission. In reality, the true planning occurs at the individual business unit operational and sales level—where the rubber meets the road. Unfortunately, the true operational and sales plans are rarely rolled up into a consolidated plan for fear that dark secrets will be exposed. This is where sandbagging becomes a ritual and the mere guessing of how much sand is in the bag becomes central to most discussions. Corporate officers are hoodwinked into thinking the corporate strategic plan is actually the consolidated plan everyone is marching toward. Yet, the strategic plan is rarely tied to the business sector’s operational, personnel, and sales plans.
Then, there's forecasting. In most organizations, forecasting is ad hoc at best. If there's a formal forecast, it's typically performed in a corporate bubble by the corporate planning department. The planning department rarely knows the right questions to ask operations and sales leaders in order to develop a realistic forecast. When the forecasts prove incorrect, another round of second guessing and mistrust between corporate, sales, and operations occurs.
Organizations with a simple, integrated budgeting, planning, and forecasting process have removed the drudgery and duplication. Most importantly, leading organizations have achieved a better view of the future of their business. What does this mean? Before answering this question, it is essential to develop a clear definition of what is meant by budgeting, planning, and forecasting.
Budgeting: Budgeting is merely defining financial targets to set parameters for cost control and accountability. The budgets should be numbers that support the strategic, operational, and sales plan for the upcoming year. For execution purposes, any budget revisions should be reflected in a revised sales and operational plan. Otherwise, the budget becomes a mere binder on the shelf and is rarely achieved.
Planning: Planning is the long and short-term forward-looking resource allocation process. In simple terms, planning typically comes in two forms: tactical plans (operational and sales) and a strategic plan. Every good planning process starts with a strategic plan upon which sales and operational plans follow. The strategic plan defines the parameters and choices in which operational, financial, and resource allocation decisions should be made.
Forecasting: Forecasting is predicting the future based on what's expected to happen in the near term. The combined results of the sales and operational plans and the budget should be the starting point for the forecasting process. The forecasting process should be a collaborative and barrier-free process where external and internal information is shared across the organization. Bringing the organization silos together is essential to realistic forecasting.
The budgeting, planning, and forecasting process can and should be integrated without complexity. When an organization learns of significant trends and changes during forecasting, adjustments should be made to the operational and sales plans, which in turn impact how and what is budgeted for the next year. The more prominent market changes exposed during the forecasting process can provide market intelligence changing the assumptions for future strategic plans. Tying the budgeting, planning, and forecasting activities together reduces the amount of time spent second guessing and roasting management over the fire.
The big question is: How does an organization integrate the budgeting, planning, and forecasting process and end to the drudgery?
Step 1: Link the planning processes with key performance metrics. The strategic planning process should include simple performance metric targets measuring the success of the organization’s strategic choices. These metrics can be tied to more granular sales and operational metrics included in the sales and operational plans. If sales and operations see the metrics and targets that are strategically important and understand what impacts the measures, the organization will have an improved understanding of how well they are succeeding.
Step 2: Simplification. Organizations lose too much holiday cheer over a complicated budgeting process with iteration after iteration. Eliminate the detailed massive budget spreadsheets allocating administrative costs between departments. Organizations fool themselves into believing that allocating administrative costs to operating entities holds operations accountable. Allocations have become a futile attempt to hide costs by spreading administrative costs over as many operational entities as possible. We suggest building a budget based upon achieving simple performance metric targets. These metrics should be the identical metrics established in the strategic and operational plans. For example, the plant manager’s budget could simply be key metrics such as inventory turns, scrap rates, capital, and cost per production unit. At that point, the planning department’s job is to build a driver-based planning model that ties the key operational metrics to the profit and cash flow projections.
Step 3: Sharing forward-looking information without fear of retribution. Forecasting is really about collaboration and knowledge sharing. If an organization has inside information about their own operations, the executives can use this insight for rapid and informed decision making. An organization should develop a common and simple format for capturing, communicating and forecasting key performance indicators on a regular basis. Furthermore, obtaining true information about what is happening in the business requires the planning department to build relationships with the business. The planning department should spend more time connecting with various parts of the business and building trusted relationships with people throughout the organization. Less time should be spent huddling over massive complex spreadsheets. Relationship building will open communication doors and facilitate information sharing. Open communications results in improved decision making and business results.
