Topic: Improving the Budget Process
Every accountant knows the traditional annual budget process has a host of problems – time consuming, contentious, rapidly overcome by events, etc. – but most still do it. This webinar explores improvements and solutions to create a better way to plan and manage to achieve that delicate balance of control, efficiency, decision support, and innovation. The focus is on the thinking and management of the budget planning process not the software and tools.
Panelists:
Russ Porter, CMA - Assistant Professor of Finance, Sacred Heart University Jack Welch College of Business & Technology
Greg Hoggard, CMA - VP of Finance at Versova Management Cooperative
Gary Cokins - Founder/Author, Analytics-Based Performance Management Advisory Firm
Bjarte Bogsnes – Chairman, Beyond Budgeting Roundtable
Moderator: Larry White, CMA – Former IMA Global Chair
Listen to the full Webinar at Panel Discussion on Improving Budgeting - IMA PM SIG Webinar.
This document presents a comprehensive panel discussion from an IMA webinar focused on improving the budgeting process within organizations. The discussion features experts sharing insights on the challenges of traditional budgeting, innovations for improvement, and the role of leadership and technology in enhancing budgeting and performance management.
Overview of Traditional Budgeting Challenges
The panelists highlight several major problems with traditional budgeting, including its static nature, lack of flexibility, and rapid obsolescence. Budgets often become outdated by the time they are finalized, limiting their usefulness in dynamic business environments. Additionally, traditional budgeting can foster unethical behaviors such as gaming, sandbagging, and last-minute spending sprees that undermine trust and decision-making quality. The process also forces premature decisions often made at higher organizational levels without the best information available. Despite these issues, traditional budgeting is recognized for providing a framework for aligning organizational objectives and offering a financial language familiar to managers.
Perceptions and Outcomes of Budgeting Processes
Polling during the webinar revealed that about half of participants view their budget process as true planning reflecting strategy, while others see it as top-down directed or a process of questionable value. The ideal outcome of a good budgeting and resource allocation process, as discussed by panelists, includes timely and informed decision-making, alignment across organizational levels, and actionable plans that lead to effective operational response. Emphasis was placed on the importance of the budgeting process itself-engaging managers to understand market conditions and operational levers-rather than solely focusing on the final budget numbers.
Innovations and Alternatives to Traditional Budgeting
Panelists recommended several innovations to improve or replace traditional budgeting:
- Integrated Business Planning: A collaborative approach involving operational leaders regularly reviewing performance and forecasts to drive forward-looking decisions.
- Scenario Planning: Developing multiple forecasts based on different market conditions to prepare for uncertainties.
- Beyond Budgeting Model: A radical approach that separates the budgeting purposes-target setting, forecasting, and resource allocation-into distinct processes. It emphasizes decentralization, empowerment, transparency, and continuous resource allocation rather than fixed annual budgets.
- Driver-Based and Activity-Based Budgeting: Utilizing cost drivers and activity consumption rates to create more volume-sensitive and dynamic budgets, reducing gaming and improving forecast accuracy.
Time Investment in Budgeting
Polling results indicated that most organizations spend between one month and a quarter of a year on annual budgeting, with fewer organizations completing it in less than a week or more than six months. This reflects the complexity and effort traditionally involved in budgeting cycles.
Barriers to Adoption of Modern Budgeting Methods
Key barriers include fear of losing control, resistance to change, trust issues, and the complexity of implementing new processes organization-wide. The panelists stressed that many existing controls in traditional budgeting are illusions and that more effective controls like transparency are preferable. The challenge is not only technical but also cultural, requiring mindset changes and leadership support. The difficulty of implementing methods like zero-based budgeting was also noted due to time and resource constraints.
Role of Leadership and Organizational Support
Gaining organizational support for budgeting changes requires strong leadership that asks insightful questions, builds trust, and engages managers across functions. Ownership of budgets by operational leaders rather than finance alone fosters engagement and better outcomes. Surveys within organizations can reveal the true dissatisfaction with budgeting processes and build a case for change. Finance professionals are encouraged to develop soft skills to facilitate rather than control the budgeting process, acting as enablers of business agility.
Use of Artificial Intelligence in Budgeting
The panelists observed that while AI has potential to transform budgeting by enabling complex scenario analysis and dynamic forecasting, current use is limited mostly to experimentation or automation of existing processes. There is concern that merely automating flawed processes will not yield improvements. Trust in AI-generated outputs remains a hurdle for adoption. The future impact of AI on budgeting is uncertain but anticipated to be significant.
The Board of Directors' Role
The board's role is seen as overseeing strategic alignment and governance rather than managing budgeting details. Trust in executive leadership is crucial for effective budgeting processes. Boards can influence progress by demanding understanding and adoption of modern performance management practices but should avoid micromanaging operational budgeting methods. Misconceptions that boards mandate traditional budgeting are challenged, emphasizing the need for mindset changes at all levels.
Examples of Successful Budgeting Practices
Two notable examples were shared:
- Handelsbanken: A Swedish bank that has operated without budgets, targets, or individual bonuses since 1970, achieving superior performance through autonomy and transparency aligned with Beyond Budgeting principles.
- Norwegian Municipality: Implementing Beyond Budgeting and self-managed teams in the public sector, achieving significant cost reductions.
Role of the IMA Performance Management Special Interest Group (SIG)
The SIG plays an important role in educating finance professionals, sharing best practices, and fostering a community for exchanging ideas and experiences. Members are encouraged to share both successes and challenges to inspire innovation and continuous improvement in budgeting and performance management.
In conclusion, the webinar underscores the limitations of traditional budgeting and advocates for more agile, transparent, and driver-based approaches supported by leadership engagement and technological innovation. The discussions emphasize mindset shifts, organizational involvement, and continuous learning as keys to evolving budgeting processes to meet modern business demands.
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Larry White CMA,CFM,CSCA
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