Planning and budgeting are core elements of performance management. They establish baselines against which to measure and monitor how well a company is doing — baselines that can (and should) be aligned with a company's overall strategy. Yet people outside of the finance department often complain that planning and budgeting are finance-centric.

For many companies, this is undoubtedly true. They see the main purpose of their forward-looking processes to be setting a budget for expenses based on assumed revenues. In that case, it's no surprise that the main emphasis is on the dollars, euros, yen, and pounds rather than on the production volumes, pallets, and tank cars of raw materials; marketing promotions; and other activities that are the business elements behind the revenue and expense items that make up the budget. Therefore, it's also no surprise that many people who do not work in finance departments equate performance management with financial budgeting.

While a company's budget is one of its major forward-looking documents, it's only one of many plans that coexist across business units. Sales departments have sales forecasts, and those that sell direct often use a disciplined “funnel” approach to do a bottoms-up projection of when specific transactions will close. Manufacturing organizations use demand plans to drive forecasts for their needs in raw materials and purchased parts, to schedule their equipment use and maintenance, and to anticipate other needs. Companies with logistics chains project inventory levels, transportation requirements, and so forth.

Within any department, then, there may be dozens of plans and forecasts, and they're usually kept on desktop spreadsheets that don't match up with one another. Our research finds that the connections between these various forward-looking activities are limited. Although companies are not completely uncoordinated, gaps routinely occur. (“Manufacturing never knows what promotions marketing is planning until it's too late” is one common complaint.) The impacts rarely are disastrous, but the lapses create wasteful costs and diminish effectiveness.

For companies seeking improvement, we advise two basic courses of action:

• One is to increase the integration of the various plans and forecasts that exist in the company.

  Our research shows that a large majority of companies have limited abilities to integrate their financial budgeting, sales forecasting, operations planning, and demand planning functions. Moreover, although there usually is some alignment between the budget and the other forward-looking processes at the time the annual budget is put together, the operational forecasts and plans are more dynamic than the financial budget. In fact, they often are updated weekly or monthly, whereas budgets typically are done annually with much less detailed reforecasts done quarterly (although some companies do this monthly).

  In addition, we find that the exchange of information between business units outside the annual budgeting process is hit-or-miss. For example, even when companies institute a formal sales and operations planning process, they rarely involve all of the key managers and executives.

  A lack of coordination leads to shortfalls in performance. This is partly the result of the left hand not knowing what the right hand is doing, leading to the inability of the various parts of a company to coordinate their actions when major changes occur in the business or its markets.

• A second, more ambitious approach to planning and budgeting is to assess the financial implications of different proposed courses of action, thereby increasing the degree to which your company attempts to optimize the long-term, bottom-line impacts of its sales and operations decisions.

  This is far from simple because the complex interactions between operational elements — sales, distribution, production, capital investments, and tax planning, to name a few — almost always make it difficult to manage to a common set of goals across the enterprise. Our research shows that most companies concentrate on solving only one or two problems, such as sales performance, capital planning, or budgeting. Often, implementing these operational strategies becomes inefficient and prone to errors because managers lack the ability to understand the consequences that each possible decision imposes on others. As a result, they routinely make tactical decisions that have negative effects on the enterprise's strategic financial goals and objectives.

Software plays an important role in facilitating and supporting a more coordinated approach to the forward-looking activities throughout the year. A more explicit and integrated approach to planning — not just budgeting — can improve how well a company performs and enhance its agility in responding to change.

For a midsize or large company, software should be a critical part of any attempt to optimize the financial impact of operating decisions, because without its help individuals rarely are capable of understanding the scope of the trade-offs that must be considered, let alone calculating the implications.

This is not to say that software is the whole answer. It is important, but the indispensable first step is deciding to change the annual budgeting process to make it a more useful and comprehensive management tool.