Central Planning for Business?

How outdated budgeting and forecasting methods are affecting the corporate bottom line

September 11, 2012

How outdated budgeting and forecasting methods are affecting the corporate bottom line

“I’ve lost count of the number of companies I’ve seen where a central office, usually the accounts department, dictates to another group of employees what their budget should be – and then acts all surprised when reality at the end of the year doesn’t match their expectations,” says Kevin Phillips, MD of idu Software.

Sales people are burdened with targets, with no consideration of their unique circumstances or input, despite the fact that the people in the field in each region have the best “feel” for what may happen in their territory over the next year – which of their big customers are losing market share, which competitors may enter the area, whether the year is going to be tough or prosperous. Providing your team with a budget with a 10% increase slapped onto last year’s sales target is not only unfair, but also unrealistic.

During hard economic times, companies often turn to top-down budgeting and dictatorial strategies. They send out the spreadsheets asking each region or department to submit its budget, then spend weeks wrestling all the returning information into shape, before sending it back again for changes…and they are likely to repeat the process several times before giving up and imposing a rather brute-force solution in the hopes of reaching the desired financial outcome.

Disregarding the opinion of middle managers can be dangerous. If management feels they have no real ownership of the budget, they are less inclined to commit to meeting it. Likewise, unreachable targets can be extremely demoralising to sales staff – and low morale equals low productivity. At the end of the day, the lack of credible information begets a vicious cycle.

There is an easy technical fix to this problem companies are facing.  When you have only one database, which everyone can see and contribute to, the problem of collating multiple spreadsheets disappears. The problem of trying to reconcile incompatible demands disappears. The problem of individual users “improving” your spreadsheets disappears. With a central database that’s accessible over the web, you can carefully control individual read and write privileges, everyone can always see the big picture and that picture is always up to date.

And if such a system is easy to navigate, understand and use, managers are empowered to make valuable assessments and contributions to the company’s financial plans. It’s easy to underestimate how scary dealing with financial information can be for those who are not financial experts.  Remove the intimidation factor; create real empowerment and you also get real accountability.

The central planning model does not work. Let’s not adopt it.