Information is the lifeblood of business. High-quality financial data, presented with completeness and accuracy, improves decision-making and strategic planning for all business functions. It catalyzes the actions and reactions of companies to the opportunities and demands that confront leadership teams on a regular basis. Whether driven by the market, customers, investors or other considerations, high-quality and properly-managed financial data can propel an organization.
Internally, executives and business leaders are looking to the finance department to play a larger role in supporting business and operational decision-making. This larger role includes measuring and managing corporate performance against strategic objectives, accurate and timely reporting of data and key performance drivers.
Cost and performance factors are also present as finance departments try to do more with the same, or fewer, resources. Combined, these pressures are forcing finance departments to look for ways to work faster and smarter.
In most companies, strategies are set with numerical targets: "We have to meet this revenue figure." Or, "We have to make this many units." Or, "We have to make this product in six months." The focus is on a number. But the problem with that is how infrequently people talk about how to get to that number. There's not much time spent truly strategizing about the roles and functions of everyone involved in meeting the target. People operate in silos, with salespeople trying to meet a sales number, and engineers working with accounting to meet cost numbers. The problem of siloed and disparate functions even further exacerbates decision-making and performance optimization.
How can everyone come together to make the numbers happen? It's a series of integrated questions: Can we really realistically make these numbers? Where are we in the product development stage? Is the target that we're developing to make these numbers even viable? Do we even have a product that's going to be available? In the absence of this approach, everyone's just walking around blindly in hopes that it will all come together.
The premise of many kinds of reporting, such as news reporting, is to report what "has" happened. Financial reporting should capture not only what "has" happened, but why it happened, how can we learn from what happened, and what lies ahead. Financial reporting should be able to answer the following questions:
Financial reporting is a means to an end, never an end to itself. Good financial reporting should contain all the necessary information, past and future, necessary to facilitate decision-making. It should lead the executive team to ask the right questions and initiate actions that will enhance the company's ability to achieve it short- and long-term objectives and create sustainable value for all.
In his book "Winning," GE's Jack Welch say about budgeting: "It sucks the energy, time, fun and big dreams out of an organization. It hides opportunity, and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity."
Indeed, the budgeting process is anything but popular. It is difficult and the resulting value is doubtful. Here are a few statistics I have gathered from various articles. Depending on the specific sources, the numbers tend to vary a bit but the general trend is the same:
It becomes an exercise in game-playing that starts at the top when management is not consistent about measurements of expectations. People play it safe by staying in the middle, without really committing. Nobody pushes for excellence.
Plans and strategies are set at the company level, then investors or the board give approval for budgets called the "board-approved budget" for the calendar year.
One of the biggest challenges with financial planning and budgeting is how to make it a value-add that helps the organization achieve its strategic goals and objectives. The process requires clear channels of communication, support from upper-level management, participation from various personnel, and flexibility to support the decision-making process.
Seventy percent of budgets are obsolete after the first quarter – due to the cumbersome process of the budgeting cycle. New projections or forecasts are developed during the budget year due to a number of factors: updated competitive information, life cycle of the business, revised availability of resources, and access to better business and operational information. Creation of new sets of targets generates re-forecasts or revised plans within the calendar year, leading to multiple sets of information.