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Study: Finance Chiefs Are Not Satisfied with Annual Budgeting Process

Apr 14th 2015
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Many finance executives say they are discouraged with how their organizations approach annual budgeting, mainly because they lack the resources to shift toward higher-value planning and analysis activities, according to the findings of a new survey from accounting firm Grant Thornton LLP and the American Productivity and Quality Center (APQC).

For their report, Financial Planning and Analysis: Influencing Corporate Performance with Stellar Processes, People, and Technology, Grant Thornton and the APQC received responses from 130 CFOs and finance leaders who work for companies in a variety of industries; two-thirds work for organizations with annual revenues of $1 billion or more. More than half are based in the United States with global operations.

Thirty-seven percent of CFOs and finance leaders who responded to the survey say their organization’s approach to annual budgeting is valuable, but they also believe their budgeting process needs improvement. An additional 25 percent say their organization’s approach is somewhat valuable, but the annual budget quickly becomes obsolete. Seventeen percent say the annual budgeting process is very valuable, but they reported not using the budget as an absolute baseline measure.

The widespread dissatisfaction among finance leaders could be due to the fact that nearly 70 percent use a “last year plus percentage” budgeting technique, which is based on prior-year figures plus a percentage to take into account planned business growth and/or inflation, according to the report. This technique does not usually account for fast-moving business risks.

While 40 percent of finance leaders rated their current financial planning and analysis (FP&A) capabilities as effective, 62 percent say their staff is too buried in basic financial management duties to improve processes. In addition, 16 percent of respondents say they have a limited budget for talent development, and 14 percent say their organization’s approach to talent recruitment and development is ineffective.

The report also revealed that companies are slow to adopt technology that enables more effective FP&A. Finance leaders primarily use data to report on what happened in the past: Sixty percent report on simple aggregation of exposures and losses, while 57 percent conduct basic cause-and-effect analysis. Only 24 percent of finance leaders report using predictive analytics techniques.

A majority of finance leaders (56 percent) say they report using a combination of spreadsheets and dedicated software for FP&A and internal reporting, while nearly 39 percent use spreadsheets alone. In addition, one-quarter of finance leaders say that some work is currently enabled by cloud technology; 22 percent say their finance team is considering or planning a move to the cloud. However, one-third of finance leaders noted they have no plans to move to the cloud.

“With more and more finance resources dedicated to regulatory compliance, too many companies fail to supplement the annual budgeting process with planning activities that could make performance more agile,” Graham Tasman, principal of business advisory services for Grant Thornton, said in a written statement. “The finance function must break away from overemphasis on managing historical data and move to enterprise-wide solutions that enable forward-looking analysis and free up talent for higher-value activities.”

Five Approaches for CFOs to Consider
The report recommends five important concepts for finance chiefs to consider that could add real value to forecasting and strategic planning within their organizations.

1. Convince business leaders that strong FP&A capabilities can free resources from transaction processing and generate value. To invest in corporate performance management (CPM) initiatives – including FP&A process modeling and talent development – a CFO has to firmly believe that the result will be better decision making that, in turn, will mean value creation. For many, that would require a leap of faith because they can’t apply classic investment analysis. They cannot claim investment payback will be achieved in 18 months or less, or that a required level of return on investment will be delivered.

Operating managers have to be open to the idea that finance people can provide value-adding analyses and should be consulted before a new strategy unfolds and during the stages of plan execution. Most likely, that will take time, trial and error, and sustained CEO, COO, and CFO support to shift the culture in the right ways.

2. Take a fresh look at FP&A design, tools, and talent. Nearly three out of four survey participants believe that their organizations are committed to upgrading core financial management systems, data models, and processes, which is in line with CEOs’ and CFOs’ needs for better visibility on emerging performance trends. Yet barely half of respondents say their organizations are committed to strengthening FP&A’s mission statement. The concern is that many companies will continue to invest in systems and tools but neglect to devote resources to ensure that:

  • FP&A and performance management processes are sensibly designed and able to align properly with the current needs of business decision makers.
  • There is a steady focus on strengthening analytical skills needed to leverage the growing interest in big data, business intelligence, and predictive analytics.
  • Attention is given to training management accountants to be business partners who know the nuances of operations and the challenges that operating managers face.
  • Resources assigned to FP&A and CPM are encouraged and trained to adopt a forward-looking mindset, as opposed to the classic approach of reporting what has already happened.

3. FP&A needs to get invited to the problem-solving table. Getting invited to the problem-solving table is a process that takes time to evolve. According to Joe Nagle, director of FP&A at CF Industries, a large manufacturer and distributor of agricultural fertilizers based in Deerfield, Illinois, the FP&A leader must demonstrate that the FP&A team can “put the data together in a way that helps operating managers better understand nuances of the business.”

4. Advanced analytical techniques deliver a clear business benefit. Advanced analytical techniques – whether statistical or empirical in nature – hold great promise in the effort to drive strong financial performance. When an organization conducts a rolling forecast of revenues and operating margins, it is anticipating and dissecting emerging trends that will impact the business four to eight quarters into the future. Every quarter or so, the organization reviews economic performance and then forecasts trends for another specified amount of time in the future. This provides a continuous cycle of reforecasting.

As a yardstick, the rolling forecast is preferable to the static annual budget because it provides the business with a continually refreshed view of opportunities and challenges. A growing number of organizations are incorporating this technique into their planning and budgeting processes, and some have even done away with the annual budgeting process altogether.

5. Use of enabling technology suggests a brighter future. Organizations that currently perform the planning and forecasting function using only spreadsheets have an opportunity to slowly migrate to a centralized and collaborative cloud-based solution. Taking this approach provides a manageable, centralized tool migration, generally starting with a collection tool and introducing more functionality over time, thus managing the investment. It also removes the errors that come with spreadsheet sharing.

The same opportunity exists for organizations using a combination of dedicated software and spreadsheets. Usually this type of organization has organically grown to add functionality to leverage spreadsheets outside the dedicated tool. These organizations can migrate the functionality out of the spreadsheets and to the web-based cloud approach, thus reducing administration required to maintain the spreadsheets and the dedicated tool.


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