Year end spend.
Who would think that in 2013, the budget game would still be played; but it is and in large multi-national companies, such as one that I was referred to this week.
One part of the game is that a division has funds allocated to it for capital expenditure (capex). If it does not spend all the money in the current financial year, head office will kindly take the excess money back. What to do? Find a project that can be implemented by year end so the unspent money can be spent. This helps to justify a similar allocation of funds for the next financial year.
With companies in developed countries crying out ‘cost reduction’ and people being retrenched, the game of allocating and spending funds does not help the situation. But it continues to be done, because we have always played the budget game.
Budgets take time – in too many companies it takes 60 days and in bureaucratic organisations there can be a problem keeping the process to under 90 days for balancing objectives, priorities and allocating resources.
Look to continuous budgets
We continually read articles and hear presentations at conferences that portray critical success factors for a business as being responsive, flexible and customer focussed. Yet if a major event occurred, how long would it take your organisation to review and re-allocate the current budget? – non-responsive, inflexible and definitely not customer friendly!
As political, financial and natural disasters can seriously affect the extended supply chains of your business, should an objective be to reduce the budget cycle from what ever it is to 20 days or less?
This should be the first step in a program to eliminate the annual budget game and move the business to a continuous budget based on rolling forecasts that look past a fixed 12 months. In a similar manner to the Sales & Operations Plan (S&OP) process, the further out, the less detailed the figures, but there is a timely update process and the framework exists to quickly modify the financial plan as events unfold.
