Secondly, if dealing with the external market changes is not enough in itself, there are new management, reporting and regulatory requirements to deal with. The Sarbanes Oxley legislation in the USA has a direct impact on all those companies listed on Wall Street. Companies will shortly have to disclose all events that will impact significantly on the performance of the business. The legislation also requires the business to report what the impact will be. Many companies’ current planning and budgeting systems simply aren’t fast enough to respond to this new requirement from Sarbanes Oxley.
Thirdly, the stakes from getting the budget wrong are getting higher. Price WaterhouseCoopers found in their 2001 study that, on average, a profit warning reduces the company’s share price by approximately 20%. In 2002, Ernst & Young found the average reduction in share price after profit warns had increased to nearly 25%.
Finally, there is the move towards quarterly reporting, putting pressure on companies to meet financial results on a quarterly basis and to reforecast more frequently.
All these issues raise an important question, “How do we improve our planning and budgeting processes so that we can plan, reforecast and motivate management within the short time frames required?”
Some Solutions
Some have suggested discontinuing the budgeting process (Hope & Fraser, 2004). They cite organisations such as Svenska-Handelsbanken who mange and thrive without a budget. But few organisations have truly taken this route. A much more widespread and practical answer is not to depend on the budget for everything. The answer to the problem lies in understanding the strengths and weaknesses of budgeting and then using other mechanisms to deliver those things for which budgeting is unsuitable.
For example, Borealis (the Danish based international plastics business) split their management requirements into four distinct agendas. They had a need to forecast, set direction, manage costs and control capital expenditure. They then set up four distinct systems to deliver each of these requirements. Forecasting was done centrally using a financial model that collected basic data from key points within and outside the company. As a result accurate reforecasts could be produced in one and a half days without disrupting the whole of the organisation’s management. Direction setting was delivered through a set of interlinked Balanced Scorecards, which set financial and non-financial targets right across the business. Cost control came from extensive benchmarking against competitors in the industry and best in class companies for the support functions such as HR and financial management. This resulted in targets being set by comparison with others, rather than on the previous year’s performance. As a consequence, the company focused the cost reduction efforts on achieving competitive advantage. Finally capital expenditure planning was managed by a central committee, who met monthly and juggled priorities with income flows.
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