The Case Against Budgeting

New survey data reveals problems in budgeting, planning and forecasting and ideas to strengthen those processes. Early movers are gaining competitive advantage.

Cathy Jorgensen, director of performance management for Fortis Health, no longer uses the "B" word. Jorgensen and her department helped the Milwaukee-based health insurer, a subsidiary of $40 billion financial services company Fortis Inc., advance its performance management processes to the point where terms like "rolling forecast," "planning" and "single performance management application" have made "budgeting" obsolete. In that respect, Fortis Health is perfectly unrepresentative of most companies, including those which participated in the 2003 Business Finance/ALG Software Budget Reforecasting Survey.

The majority of respondents use budgets, but they also use pointed language to describe their company's planning processes. "Poor budgets, worthless exercise" is a typical comment. Two simple messages course through the 100-plus candid remarks survey respondents provided: The budgeting process takes far too long, and the end result is stale by the time it is completed. Businesses need more agile forecasting and reforecasting capabilities, but the organizational barriers to those capabilities are formidable. Judging from the responses, generating a brighter budgeting and forecasting future will require companies to make significant behavioral and procedural changes and upgrade their tool set.

Asked why their company's budgeting process veers off track, survey participants responded with blunt comments, including "poor strategic planning," "robs management of opportunity to take corrective actions," "lack of confidence in budgeting process leads to apathy," "minimal buy-in," and "assumptions are too aggressive." Other responses, such as answers to the question of how ineffective budgeting affects the organization, read like the barbs of a Letterman Top 10 list (think "Top 10 Reasons Companies Lose Value"), except that they're more dispiriting than humorous: "decreased morale, cash flow issues and problems"; "constant disappointment and subsequent reforecasting"; "deferred capital acquisition and expansion plans"; "earnings surprises"; ... and the number one result of ineffective budgeting and forecasting processes: "Bad decisions are made!"

Improving the speed and quality of decision-making is the core mission of business performance management software. Jeff Polner, senior director of financial systems and analysis for Primedia's consumer and media magazine group in New York City, notes that effective performance management processes and tools can help reallocate financial planners' and analysts' time from compiling data and building reports to addressing why variances occur. "That's what they're paid to do, yet at most companies they're left with a fraction of time to answer the question 'why?' " Polner says.

"Ultimately, management decisions are being made based on the answer to that question," he adds. "The more time you have to answer it, the more informed your decisions are going to be and the better chance you stand of making the right decisions." But before finance executives and managers can spend more time on "why?" they need to understand the current state of budgeting and forecasting and the barriers to progress within their organization.