Though summer is still in full swing, CFOs’ thoughts have already turned toward next year. Thus begins the annual budgeting season, with the inevitable multiple versions making their way through endless rounds of approvals.
The number of budget versions before final approval reflects the efficiency of the budgeting process: the fewer the rounds of revisions, the less painful it is for the people, procedures, and systems that support the operation to arrive at a final version. Reviewing and editing draft after draft is time-consuming and often frustrating; so, for many organizations, eliminating unnecessary iterations is a goal to strive for.
For this month’s metric, we focus on the number of budget versions produced before final approval, as reported to APQC’s Open Standards Benchmarking® for Planning and Management Accounting by 1,450 organizations.
Typically led by the CFO, the budgeting process is defined as “allocating funds to meet future and current financial goals.” The activities associated with this metric include developing and maintaining budget policies and procedures, preparing periodic budgets and plans, and preparing periodic financial forecasts.
The top-performing 25% of organizations achieve an approved budget with no more than four budget iterations (see chart below). The 25% of organizations that constitute the bottom performers churn out eight or more versions before finally arriving at a final budget — at least twice as many iterations as the top performers. Lastly, the organizations that perform at the median need five versions to finalize their budgets.
Every budgeting season I’m reminded of the process of moving into a new house. Nobody wants to spend days loading and unloading trucks and driving back and forth between the old house and the new one. Moving that way is a headache, and by the time you’re done, all those family and friends you enlisted to help you move are secretly hoping you’ll stay put for a long, long time. It’s a lot better to just get a bigger truck, rally helpers for a single afternoon, and get it done in as few trips as possible.
If it takes you several days to move your belongings from one house to another, chances are you didn’t plan ahead very well. Budgeting is exactly the same way: the more time and thought that the organization puts into planning ahead, the faster the actual drafting and review process will be.
Build in transparency. Miscommunication and misunderstandings are some of the reasons that budgets get sent back to the drawing board, over and over. Long before anyone starts building a budget, everyone who has a stake in the process needs to come to a common understanding of reasonable stretch goals. Leaders sometimes have a goal in mind for a given business unit that is wildly different from what the unit managers are envisioning. The executive team should be completely transparent about what it believes are achievable goals for the next year. It also needs to actively get buy-in on those goals at the management level before taking those targets to the various teams, departments, facilities, and locations.
Set deadlines. Another way to limit budget iterations is to establish timeframes and deadlines and stick to them. For example, each draft should be due on a specific date, all stakeholders should have one week to review it and provide their comments and edits, and the next draft should be back for review exactly two weeks later. Put the deadlines in writing, and make sure everyone is in agreement and committed to sticking to the deadlines. That holds everyone accountable for providing input at the beginning of the process, and helps prevent them from tinkering with what should be a final draft at the end of the process.
Get people out of silos. Working in silos is another big reason that budgets get revised over and over. One business unit’s budget inevitably affects others. If a manager creates a budget in his own silo, he might be confident that his team can deliver on the goals. But this approach doesn’t take into account the teams who execute the parts of the workflow that occur before or after that specific silo, or the information technology, sales, and marketing efforts that support that silo. Without interdepartmental negotiation and information-sharing, multiple rounds of edits are almost guaranteed.
Establish version control. Budgeting by committee is valuable, but when everyone is editing the same document at the same time it’s easy for wires to get crossed and changes to be missed. It’s critical to get a firm grasp on the various iterations of the budget and to track who has made what changes. A centralized master file, kept under one person’s control, eliminates confusion that can cause delays. Or better yet, purpose-built planning packages often come with built-in version control.
Some organizations have decided that budgeting isn’t really necessary to accomplish their goals, and they’re eliminating the process altogether. That may not be possible at every organization, where budgeting is a key part of the annual strategic planning process.
However, any organization can set a stretch goal to minimize the number of iterations that cross people’s desks during budgeting season. With proper planning, effective communications, and a good process management structure in place, it’s not unrealistic to expect your organization to rank among the top performers and knock that budget out in four versions or less.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.