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Budgeting: the most ineffective management practice?

Management guru Jack Welch described budgeting as ‘the most ineffective practice in management’. Some finance chiefs probably agree with him

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"People are human and they do make mistakes, but I hate it when we make mistakes," says Mary Ellen Kelley, chief financial officer for the New England town of Framingham, where "spreadsheet errors" recently left a $2.4 million (£1.5 million) hole in its $240 million operating budget for 2012.

Britain's second largest drug maker AstraZeneca recently had to reiterate its mid-term and 2011 financial forecasts after a "spreadsheet error" resulted in "out of date planning information" being distributed among members of the analyst community.

Events such as these are unfortunate, but not unusual. There has always been an embarrassment of riches where spreadsheet errors are concerned, but let's be clear about one thing: it's usually down to human error, rather than the software. So it's fortunate that software designed specifically to handle budgeting, forecasting and planning can reduce the potential for errors.

Investing in a specialist system has enabled Rowanmoor Pensions to improve its budgeting and planning in all sorts of ways. "The budgeting cycle used to be half yearly and now it's quarterly," says James Simpson, financial administrator. "The time savings generated by the new system enable us to analyse our finances more regularly," he adds, and this allow those involved to spend more time on other value-adding activities.

"Producing balance sheets is quick and easy, delivering a holistic view of the company's finances at any one time," he says. "The finance director was hoping for full integration between the balance sheet, cash flow, and P&L, and the system has delivered this."

The finance team has also had lots of positive feedback from other members of the management and executive committees. "Managers have access to more information and it's more timely," Simpson says.

Future forecasting

And it's much easier for them to review budgets on a monthly basis. The analysis capabilities of the new system make it easier for Rowanmoor Pensions to understand why things are happening and to plan for the future. "We are better equipped for forecasting the effect of potential company and market changes," Simpson says, "and people have become much more aware of what the budget drivers are."

At the multi-channel marketing company Data Mail, CFO David Putt knows exactly what the budget drivers are. "We don't budget for sales, its all about driving down costs as a percentage of sales," he says.

"Data Mail doesn't have recurring receivables or make goods for inventory, and our production moves up and down depending on orders for the next five weeks," he adds.

The three things that most drive the associated costs up and down are the price of paper, the power to run the presses, and the most expensive resource of all: people, he explains.

"This business is different to lots of other businesses, and budgeting and planning are a little different here too," says Putt.

"Data Mail is a job shop, and the mix of things in each job is unique, so it doesn't lend itself to apples with apples comparisons," he adds. But there are still ways in which a specialist budgeting, forecasting and planning system can improve things.

"Before we started using [the software] we didn't really do any target setting, or measure progress against these, because of the time it took using spreadsheets just to get the day-to-day financials,' he says.

Measure, monitor and manage

The system now provides the CFO and his colleagues with the tools and the time to measure, monitor and manage their progress towards a range of indicators: some quarterly, some monthly, some daily.


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