“By the Time We Finish the Budget It Is Already Outdated.”
With a budgeting process that takes several weeks, sometimes months, the final version of the budget can be missing important information that came up during the process: a new client signed, the leave of a key employee, a pandemic…
So, what’s the benefit of going through this costly process?
There is no short answer to this question. However, the budget remains an essential tool to keep everyone aligned with the company’s strategy, and its short-term and long-term objectives. In most cases, it is also a mandatory process for reporting purposes to auditors and financial institutions.
“The Budget Is a Long Process; We Want to Make the Most Out of It.”
For a company to survive in a competitive environment, not only does it need a good strategy, but it also needs to communicate it and implement it.
The budget process remains a conservative process, looking toward the present by analyzing the past. It can help answer questions such as “Why is the margin lower than expected?”
One of the major drawbacks of this process is the lack of visibility toward the future. It does not support our interrogations on:
- “What should we do?”
- “How are we doing compared to the competition?”
- “Are we investing where we should?”
To bridge this gap, high management usually comes up with a “strategic plan,” with short term and long-term indicators to clarify where the company is heading.
Aligning the Budgeting Process With the Strategic Plan
To align the budgeting process with the strategic plan, Kaplan and Norton (2006) suggest using key performance indicators (KPIs) in a balanced scorecard model with four perspectives: Finance, Customers, Internal Process, Innovation and Learning.
| Financial | What are our shareholders’ expectations for financial performance? |
| Customer | To reach our financial objectives, how do we create value for our customers? |
| Internal Process | What processes must we excel at to satisfy our customers and shareholders? |
| Learning and Growth | How do we align our intangible assets—people, systems, and culture—to improve the critical processes? |
Breaking down the performance of the company into these four different perspectives while understanding the interdependencies between them helps high management to have an overall understanding of the challenges the company is facing. Also, it generates more attention and alignment from the divisions.
Aligning organizational units to create value at the enterprise level generally gets less attention than creating value at the business unit (BU) level.1
We often see corporate headquarters detached from the BUs realities as the headquarters does not deal with customers, nor does it run processes to make products or services.
As a matter of fact, one of the headquarters' main objectives is to align the BUs in their value-creating activities, and help each one of them achieve its own objectives.
If You Can’t Measure It, You Can’t Improve It
Even with a well-thought, balanced scorecard, one of the fundamental issues with KPIs is the availability of the data to feed them and track the company’s progress. The ability to collect the data daily without disturbing the work of the BUs is a major challenge.
Nonetheless, nowadays data is collected every day in the different systems and databases of the company; thus, an interesting approach would be to do the inventory of the data already available and see how it can feed the company’s balanced scorecard.
When Is a Good Time to Implement a Balanced Scorecard?
With the evolution of technology and the need to be able to process more and more data, the company will eventually be forced to implement a new EPM2 solution to facilitate the budgeting process. During this project, management will generally gather a group of analysts and managers already accustomed to the company’s reporting process to drive the project.
We often notice a misalignment among the members of this group on how to manage the project and the expected outcome. This is a symptom of a communication gap with high management regarding the company’s priorities and its strategic plan.
Before diving into the implementation of a new EPM, it would be interesting for high management to work with its BUs to discuss its KPIs and the priorities of each stakeholder. And by doing so, not only will the balanced scorecard arise from the project naturally, but it will also be a great initiative to align the BUs with the company’s strategic plan. Contact us to learn more!
- Robert S. Kaplan & David P. Norton “Alignment: Using the Balanced Scorecard to Create Corporate Synergies” (2006)
- EPM: Enterprise Performance Management. As per the Oracle website: “EPM refers to the processes designed to help organizations plan, budget, forecast, and report on business performance as well as consolidate and finalize financial results (often referred to as “closing the books”). EPM solutions are primarily used by CFOs and the office of finance, while other functional areas, such as HR, sales, marketing, and IT, use EPM for operational planning, budgeting, and reporting.”
Sources
https://www.oracle.com/ca-en/performance-management/what-is-epm/
