The "perfect" budgeting process appears to be equal parts strategic planning, automation, effective budgeting tools, teamwork and dedicated resources. This article looks at some of the methods controllers have developed to get as close as possible to that ideal budgeting process.
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If strategic planning is about setting the company's destination, budgeting helps create the most efficient vehicle for getting there. As Karen Bauer, chief accounting officer of Allied Research Corp. puts it, "Without budgeting, the company could not achieve its strategic plan." So it naturally follows that strategic planning and budgeting should be as integrated as possible.
That is the approach recently adopted by Republic Bank of Chicago. Last year, with the arrival of a new president, the bank began to coordinate the strategic planning and budgeting processes. The same people who develop the strategic plan — the chairman, the CEO, the president, the CFO, the controller, the senior lending officer and the regional presidents — also have equal input on the budget. This way, "the strategic plan becomes the foundation for the budget," said Bernard Mayle, the bank's vice president and controller.
The bank's strategic planning/budgeting process begins with a three-day mini-retreat during which Mayle and senior officers of the bank meet to discuss the strategic plan and the means for achieving it. These discussions range from human resource planning to investment decisions to overall budgeting. "We develop an idea of what we want to spend to achieve our strategic goals, as well as what changes we will implement," said Mayle.
This strategic planning/budgeting coordination will be particularly important for FY '98 because the banking industry is undergoing some important changes as a result of recent tax law modifications. The changes are complex and will require a new look at how the bank measures its shareholder return and profitability, said Mayle. Just how effective is this approach? For the first six months of FY '97, the bank has been within 1 percent of budget. "This is the most accurate and most realistic budget we've ever had," said Mayle.
While other companies may not as explicitly tie strategic planning to budgeting, most controllers agree that strategic planning is an important driver of the budgeting process. "I need to know what senior management is trying to accomplish and send that message to everyone in our facilities so they can develop a realistic budget," said Keith W. Jones, controller and chief accounting officer of Renal Treatment Centers Inc. in Berwyn, Pa. "Defined goals relative to earnings and other areas are important so we can start with where we want to end up and work our way backward."
Dallas-based Brinker International also allows the budget to grow out of the strategic planning process. By identifying and discussing the critical goals involved in achieving the strategic plan, such as new product introductions, managers and directors can determine how they will achieve those goals. "This way, everyone understands corporate goals and their part in achieving them," and that is reflected in the budget, said Tom Gispansky, senior vice president and controller.
Develop Strategic Service Centers
To facilitate the budgeting process, Fairfax, Va.-based SIGNAL Corp. has developed strategic service centers with budget responsibility. In 1997, the company had about 12 strategic service centers in areas such as accounting, payroll, accounts payable, materials handling, purchasing and contracts. The company plans to have 16 or 17 strategic service centers in 1998.
Each service center handles its own budget and accounts, and receives detailed reports about what has been charged to those accounts. "This strategic service center approach has worked well because more people at lower levels have input on the budget. People in the service centers have a lot of control and a lot of accountability for their performance against budget, and, as a result, have more realistic expectations for the budget," said Scott Goss, SIGNAL Corp.'s controller. "This approach not only has been warmly welcomed, it has helped increase profitability. It has also streamlined decision-making, because people essentially have a level of preapproved responsibility defined in their budgets." Moreover, "if we didn't take this strategic service center approach, we would get very little input on the budget," said Goss.
Work With Your Internal People
As SIGNAL Corp. discovered, internal buy-in and cooperation are critical to developing a successful budget. "Traditionally, people don't like the budgeting process, so it's important to break it down into understandable pieces so that it can gain some momentum," said Bauer.
When Jones joined Renal Treatment Centers Inc., the budgeting process was limited to corporate personnel only, with little input from operations. "We've since changed so that the budget is everyone's process," he said. Operations, which represents administrators of the company's 130 facilities in the United States and 19 facilities in Argentina, now controls the budget with guidance and input from accounting and finance.
"We've tried to open the books to everyone, giving them information on past operations, expenses, revenues, labor costs and the numbers they've achieved in the past," said Jones. "We provide guidance from a financial perspective while also moving the process along. People get upset if budgeting takes too long." Since he made these changes, there have been definite improvement in performance against budget, and Jones estimates that the company is now within 5 percent of budget.
But to get more people involved in the budgeting process, controllers may have to educate them about the process. For example, as controller of a small service group that handles quality control testing for Pfizer's manufacturing operations, Krebser works primarily with chemists and other scientists who are not interested in the budget process. "These people need to understand what budgeting is all about," he said. To help them do that, Krebser wrote a manual defining various budgeting terms and outlining what he needed from managers to create an effective budget. However, "you can't force people to handle things in a certain way," he said.
Once the managers present their budgets, Krebser discusses the budget to determine if the amount is appropriate for their areas' needs. In addition to comparing the previous year's budget to the forecast for the next year, Krebser also uses an activity-based approach to determine what each manager needs to accomplish his or her goals. "The division services pharmaceutical manufacturing and must adhere to very specific testing procedures as mandated by the Food and Drug Administration. Therefore, managers know how much time and staffing it takes to complete testing," he said.
This activity-based approach also empowers the managers because it allows them to "demonstrate that a budget increase for the division might be necessary even if manufacturing is cutting its own budget," said Krebser. Overall, Krebser estimates that this cooperative approach has cut in half the amount of time needed to develop the budget.
Another advantage of including more people in budget planning is the additional level of detail that is contributed in the process. "Details are critical in the budget because this is the way to identify savings," according to Michael Murphy, hub controller for Delta Air Lines Inc. at Dallas/Ft. Worth International Airport. "If you can identify it, you can save it."
Automate the Process
At least part of the resistance to budgeting comes from the perception of a time-consuming and paper-strewn process. That is why many controllers are working to make budgeting as automated and paperless as possible. The level of automation ranges from using e-mail and spreadsheet tools to using a software interface to minimize time and potential errors caused by manually inputting data.
"We handle budget input solely through e-mail," said Lynn Frischkorn, budget analyst for the American Petroleum Institute in Washington, D.C. "I attach a spreadsheet to be completed so that people can manipulate those numbers as they see fit, add information, share it with others, and then send it back. On our end, automation eliminates the need for hand checking the information after it has been entered into the system."
The spreadsheet is accompanied by a guidance memo that provides context for the financial information in the spreadsheet and alerts managers to specific areas they should focus on. As a result of this e-mail approach, "we've been able to reduce the number of meetings because many of those meetings revolved around making sure everyone had all the information they needed," said Frischkorn. "We now finish the budget in three months, rather than six months."
"We develop an Excel model that managers can just fill in so they don't have to start from scratch," said Goss. The company launches the budgeting process in October with a meeting of Goss, the CFO and the lead budget person to make sure everyone is on the same page and to develop the Excel model. "Because people don't have time to read a lot of information, we write a one-to-two page memo with information about the process and expectations for it, including due date guidelines, who to contact with questions, and instructions on how to complete the spreadsheet," said Goss. The company also provides people with forecast vs. actual from the current and/or previous year's budget as a benchmark for developing new budgets.
"I use an accounting software system that consolidates budgeting so I can do a quick analysis to see what's best for the business," said Krebser. "Because 80 percent of our budget is for staffing, I can model multiple staffing and budget scenarios by entering average wages/salaries and benefit rates, as well as overtime."
Provide Dedicated Budget Support
Having staff members who are at least partly dedicated to budgeting has been important to many controllers' efforts to streamline the process. Brinker International now has concept controllers who are assigned to each of the company's seven "concept" dining chains. "These positions used to be centralized but are now part of and located with each concept team," said Gispansky. Concept controllers provide financial guidance to aid decision-making, evaluate monthly budget reports, and generally keep each concept on budget.
"Adding a dedicated budget person to our staff has been a key for us," said Jones. The budget analyst deals with operations and executives to keep the budgeting process on track, gather information, and develop necessary spreadsheet tools. "Before we had a dedicated budget person, we found it difficult to put aside our everyday work to concentrate on budgeting."
In addition, Renal Treatment Centers has created virtual offices with a financial analyst available for each region to meet with administrators and give a kind of "Accounting and Finance 101," said Jones. "We also provide models for staffing, model budgets, and benchmark information on the budgets for various sites so administrators can learn from the successes of their peers."
Start Early
Many of the controllers interviewed for this article stressed the need to start the budgeting process early to allow enough time to get it done before the fiscal year begins. For example, Renal Treatment Centers' fiscal year begins in January and Jones starts the budgeting process as early as May with conference calls to get people thinking and focusing on the budget. "We've started the budgeting process earlier so that people aren't pressured to the finish as the deadline approaches," said Jones. "The budget is a detailed process, and these conference calls are an opportunity to start with a big-picture look at what the company is trying to achieve."
"Late budgets are never good budgets," added Goss of SIGNAL Corp. "You must leave enough time to do a good job."
Hold Them Accountable
All this good work on creating the budget will be for nothing if individuals aren't held accountable for meeting those budget numbers. That's why Goss conducts monthly budget reviews to see where people are against budget. "If they are off budget, we discuss why and how the person is going to get back on track. People come into these meetings knowing they are accountable for budget overruns and prepared to present their plans to correct it," said Goss.
In addition, "having senior-level people conducting these meetings gives the process credibility and forces people to want to do the right thing."