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Hooray - It's Budget Season - Not!

"I am so pumped for this year's budgeting process" - I'm pretty sure that phrase has never been said before - and with good reason. Year end always seems to have lots of activities that generate stress and anxiety:

  1. Trying not to forget to move “Freddy” our Elf on the Shelf after the kids go to bed (My wife’s skill at making up reasons why Freddy didn’t move is amazing).

  2. Holiday season preparations

  3. Finalizing next year’s budget

Ebenezer Scrooge couldn’t make up a more tedious activity for the holiday season.

I have two goals for this blog:

  1. Getting you to read 1,000 words on budgeting and forecasting

  2. Explaining why I have such disdain for the old antiquated process of budgeting

The Budgeting Process

During the first half of my career, I was a simple cog in the budgeting process. I developed the timeline – which typically started in early September and ran through early January whereby the budget would be blessed at the new year's first Board Meeting. Basically, we spent four months of the current year worrying about next year. Of course even with all that planning, no one ever completed their budget on time, nor was anyone’s first budget ever accepted.

The process became a very predictable game (kind of like Tic-Tac-Toe - no one wins). No one wanted to spend valuable time working on a financial exercise while they were running the businesses. They also knew that whatever they presented to senior management wouldn't be accepted. Ultimately, they would be asked to “sharpen their pencils” and provide a new “stretch goal” and of course, “Sandbaggers” would be ridiculed. One year, I built a highly detailed bottoms up budget using operational input from all of the operational leads in my division (I was in the truck leasing business for one of the world's largest most well known companies). I used all the data available, local pricing and fleet information, etc… We built a realistic, supportable plan – of course were told to increase the top and bottom line by 10%. I never understood why go through the exercise if someone higher in the organization already knew the targets. Incredibly,, reported that 70 percent of finance leaders use a “last year plus percentage” budgeting technique, which is based on prior-year figures, plus a percentage to take into account planned business growth and/or inflation.

When I look back on it, we must have really liked the budgeting game as I think we cycled through like 7 or 8 versions each year. There’s nothing like thinking you are finished with a CRO budget and then finding out a cancellation or sales miss changed everything. Not to mention dramatic exchange rate changes. As you can see below the Euro to USD exchange rate changed by over 6% since the end of August. 6% may not seem like a lot - but updating all your budget files each month for the change can be cumbersome if you don't have a sophisticated model.

The budget game even had a trophy – a very large binder of spreadsheets that usually sits prominently on everyone’s bookcase. Sadistically, we then compare monthly actuals to the inflated “stretch budget” and then come up with reasons why the targets no one thought could be achieved in the first place were missed.

All that being said, a well constructed budgeting process does have a few benefits:

  1. Discussion on next year’s strategy and resources needed to achieve the strategy

  2. A target that can be communicated and used to incentivize the organization

Continuous Forecasting

When I became CFO at Omnicare Clinical Research (later known as Theorem Clinical Research), I finally had the authority to put the "old" budgeting process to rest. We implemented a continuous forecasting process. Essentially, every month we would reforecast out the next 12 months. The result was we had real time information every month to make business decisions. Eliminating the useless concept of explaining variances to budget. Here are my reasons why:

  1. A budget is outdated and obsolete 30 days after it is finalized. The business and business environment is always changing, but budget is static. PWC has a great reporting giving examples as well.

  2. The budget binder doesn’t have any answers so why treat it like a company’s bible. If revenue is off $500K YTD July – it’s not like the budget binder has the answer on how to make it up. Circumstances change – maybe only being off by $500K is a tremendous management achievement due to circumstances out of their control. Maybe it’s just the result of an unrealistic budget.

  3. Focusing on the future is more important than dwelling on the past - I want my organization spending time thinking about how to grow the business (learn from the past don’t overanalyze it to death).

  4. Lastly, managing to budget can be silly. As an operator, my goal is always to grow as quickly and as profitably as possible. If I’m favorable to budget, I’m not going to take my foot off the gas just to achieve budget. My mindset is to do what’s best for the business at the moment regardless of my performance to budegt. Public companies get into trouble here as they sometimes make short-term decisions at the expense of long-term profitability just to appease quarterly expectations. In fact, the financial sector’s (i.e. Wall Street) influence on management has become so powerful that a recent survey of chief financial officers showed that 78% would “give up economic value” and 55% would cancel a project with a positive net present value—that is, willingly harm their companies—to meet Wall Street’s targets and fulfill its desire for “smooth” earnings.

How did we break the cycle? The entire organization played a role:

  1. I built a fully integrated financial model that provided all of the metrics I felt were needed to effectively run the business

  2. My finance team worked with operations to reforecast our existing backlog every month. They were good at it too – while we could have some swings study by study, our near-term forecast was typically within 3% of our actual results

  3. Our accurate revenue forecast allowed us to better understand our staffing demands. Important as the Theorem employee base grew from less than 900 employees in 2012 to close to 1,400 worldwide.

The Benefits

  1. A living breathing financial model that contained all of our key process indicators. We could quickly identify problem areas or opportunities and do a deep dive to better understand the issues.

  2. We could quickly communicate results and projections. In fact, I was able to present results and projections to the executive management team and our senior leadership a few days after monthly actuals were reported. Quarterly, we would present our financial picture to the entire organization at town halls.

  3. Important decisions regarding the company’s strategic future were made quickly – no need to wait for a “budgeting process”.

  4. The entire organization didn’t get locked up for 4 months working on a cumbersome financial process. Our December forecast simply became the following year’s budget.

  5. Lastly, when the Board decided to pursue the strategy of selling the business, we had all of our historical results, future projections and KPIs all in one place. Creating a controlled, easy sale process.

Wrapping Up

Well, if you made it this far, you deserve an extra drink on New Year’s Eve, as you’ve now read over 1,000 words on budgets and forecasting. What I’ve written about isn’t revolutionary and moving away from the traditional budgeting cycle has occurred in many progressive organizations. However, there are still a lot of companies that are stuck in old ways of thinking. Hopefully, current CFO's can make the switch to continuous forecasting and change the CFO stereotype:

To all CFO's, you will definitely stay off your company’s “Naughty List” if you revolutionize your budgeting process. Happy Holidays!

Jason Monteleone is President at Pivotal Financial Consulting, LLC. A Strategic Financial Consulting Firm serving the Clinical Research Industry. Jason can be reached at Follow me on Twitter @JMPivotal.

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