Business Intelligence Network - The Vision for BI and Beyond

A desire to improve the budgeting process is the #1 reason companies decide to implement a business performance management (BPM) solution. Reading between the lines, one can surmise from that statement that the budgeting process at companies that have not implemented a BPM solution is less than ideal. And that would be an understatement, according to a recent survey of budgeting trends and issues conducted by Centage and IOMA (Institute of Management & Administration). The survey revealed an overwhelming dissatisfaction with budgeting tools and processes among most of the C-level executives surveyed.

Note:Survey participants represented companies of all sizes in more than 20 industries. This article focuses on the findings related to small and midsized businesses (SMB) – companies with annual revenue of $10 million to $99 million; and the small to midsized enterprise (SME) market – $100 million to $499 million in annual revenue. To request a copy of the 2007 Budgeting Survey: Benchmarks & Issues report, which reflects findings from companies of all sizes, go to www.centage.com/SurveyReport.

The most common “headaches” associated with budgeting and forecasting are:

Headache #1: People

By far, the biggest headache cited by CFOs and finance executives at SMB and SME companies is gaining buy-in from other managers in the company, according to the survey.

The problem is “getting budget owners to take the time to really think about their business and actually filling in the budget…they rely too much on Finance,” said one participant in the anonymous survey. Others commented that managers:

• Don’t take ownership or accept accountability for their piece of the budget
  
  
• Don’t fully cooperate or participate in budget development
  
  
• Lack understanding of the process or what’s required
  
  
• Don’t meet deadlines
  
  
• Pad budgets or provide unrealistic numbers.

Headache #2: Spreadsheets

The second most common “pain point” cited was working with spreadsheets or other technology-related issues. Four out of five of these replies expressed frustration specifically with budgeting in Microsoft Excel spreadsheets, including:

• The manual and time-consuming nature of the process
  
  
• Frequency of errors
  
  
• Difficulties generating reports and rolling up numbers
  
  
• Inability to drill down into the numbers
  
  
• Inability to create what-if scenarios.

One survey participant tied together the technology and human shortcomings of the budgeting process: “[The] initial pain is due to [the] use of spreadsheets, and getting qualified information in a timely manner.”

Amazingly, despite the overwhelming frustration with spreadsheets, they remain the most common tool for budgeting and forecasting, used by 85 percent of small to midsized businesses and 76 percent of small to midsized enterprises, either alone or in combination with a general ledger (G/L) or enterprise resource planning (ERP) system.

Confidence and Compensation Disconnect

The survey confirmed that the role of the budget continues to grow. For example, today's budget is considered an important cash flow management tool, and meeting budget is one of many performance measures that can actually impact executive and management compensation. Yet finance executives view their budgets as only somewhat accurate. Witness these findings:

• Executives at more than 40% of the SMBs/SMEs view their budgets as extremely or very important cash flow management tools, and about 40% rate them as somewhat important. The budget’s cash flow management aspect is most important at companies with annual revenue less than $10 million.
  
  
• The overall trend is to link compensation to the achievement of goals such as meeting budget, seen at 47% of SMBs and 65% of SMEs.
  
  
• The larger the company, the more compensation is put in this at-risk category: under 10% to 20% for SMBs and 10-20% for SMEs.

But – and this is a big “but”:

• Most finance executives are not totally confident in the accuracy of their budgets in the areas of cash flow, bookings, revenue, expenses, and collections and disbursement. For SMBs, 61% are only somewhat confident, not very confident or not at all confident in their ability to accurately budget cash flow. For SMEs, the amount rises to 79%. Companies less than $10 million are the most confident in their ability to budget cash flow.

Budgeting Trends

 Other budgeting trends identified by the survey include:

• Nearly 75% of SMBs link their operating budgets to corporate strategic plans, as do 80% of SMEs.
  
  
• Regardless of size, most companies devote 4-8 weeks to their annual budgeting cycle, although in general the smaller the company, the less time they take.
  
  
• The most common acceptable tolerance level for variances from budget to plan is plus or minus 5-10% for revenue, expenses, EBIT and cash flow, at all companies. SMBs/SMEs are less likely to restrict variances to plus or minus 5% (36-37% do this) compared with larger companies (60%).
  
  
• The consequences for exceeding acceptable tolerances are usually minor, but can include compensation impacts, formal reprimands or job loss at 28% of the companies surveyed.
  
  
• SMEs generally reforecast monthly or quarterly, which is more frequently than smaller companies and less frequently than larger companies.
  
  
• About one-third of respondents use rolling forecasts as a financial management tool.
  
  
• The most common key performance indicators (KPIs) for SMB/SMEs are net income/loss, gross profit percentage, and operating expenses as a percentage of sales.

Conclusion

Many of the survey’s findings about the trends and issues surrounding budgeting and forecasting point to a troublesome conclusion: More is riding on today’s budget – cash flow management, KPI measurement, compensation, strategic decisions – and more is being asked of CFOs than ever before. Yet the 21^st century budgeting process has not evolved along with the budget’s role; it still has considerable weaknesses. Changing that process requires adjustments to the human elements of the process – something best accomplished according to the individual company’s organizational structure and corporate culture.

Furthermore, although budgeting and BPM tools have evolved as the budget’s role has grown, the statistics show that the vast majority of SMB/SME companies (and all size companies for that matter) have not embraced business performance management technology as the easy and effective route to a better budget. BPM vendors and SMB/SME companies alike need to reach out and bridge this disconnect so that CFOs can transform their budgets into the accurate, flexible and powerful business tools that are required today, and on which they will base tomorrow’s strategic decisions.