Cycle Time to Complete the Annual Budget: Metric of the Month
Do you remember the classic holiday song, “It’s the Most Wonderful Time of the Year” by Andy Williams? Well, if you ask CFOs and business unit managers about their favorite time of year, few, if any, would say budgeting season. In some organizations, the budgeting process can start in June or even earlier and drag on for months. When this happens, organizations risk disengagement from stakeholders. Even worse, managers or business unit leaders will begin putting in whatever numbers they think executives want to see, regardless of whether those numbers are realistic or achievable.
Completing an annual budget doesn’t need to be this painful or protracted. Leading organizations finish their yearly budgets in less than a month. After reviewing benchmarking data on cycle times for completing the annual budget, we’ll look at four practices that leading companies use to speed up the process.
The cycle time to complete the annual budget measures the number of calendar days (including weekends) that it takes from establishing budget objectives to delivering a ready-to-use budget. Based on data from more than 3,900 organizations in our Open Standards Benchmarking survey for Planning and Management Accounting, APQC finds that top performers complete the annual budget in 25 days or less — half the time it takes organizations in the 75th percentile.
Driving Down Cycle Times
The four practices below finance leaders avoid the back-and-forth of protracted negotiations and drive a smoother budgeting process.
1. Start later. Though it may seem counterintuitive, many organizations have seen substantive improvements in cycle times by starting the process later. Doing so enables the organization to observe more of the current year’s actual results rather than creating a budget heavily dependent on forecasts of the months ahead.
In a dynamic environment where so many macroeconomic issues are at play, fourth-quarter forecasts prepared in the second and third quarters may already be obsolete. Allowing the time to observe more concrete and reliable data by waiting longer to start the process may produce a more realistic and sounder budget for the next fiscal year.
Relative to the entire cycle time, finance professionals spend relatively little time working on the budget. Much of the cycle time comes from waiting for inputs or responses from others in a series of back-and-forth negotiations that produce five versions of the budget as a median. The time that this back-and-forth consumes only increases when the negotiations happen across multiple levels. Compressing the timeline squeezes out these non-value-added time delays.
2. Negotiate with the company’s best interest in mind. Not every business is a car dealership, but far too many people involved with the budget act like they either work at one or are buying a car from one. One party starts from an aggressively high operational or financial target, while the other party starts with an aggressively low target. Then, the period of non-communication and stalling begins, eventually followed by some version of “here’s what I’ve been authorized to do.” This is one of the biggest reasons for long budgeting cycle times, and it creates enormous amounts of financial waste. All parties need to remember that they are preparing a realistic and ambitious budget for the sake of what’s best for the organization, not trying to negotiate the price of a used SUV.
3. Engage in financial diplomacy. The budgeting process should not be a war of finance versus operations or executives versus managers. As a financial leader in the organization, engage all stakeholders with open and clear communications. Always keep the best interests of the company front of mind and let all parties know what the objectives are. Make the process a collaborative effort by getting stakeholders to help construct solutions when impasses occur. Maintaining peace and calm in budgetary discussions will help keep cycle times lower. It is also a good opportunity for the CFO to flex their soft skills (e.g., negotiation, communication, and problem-solving). Remember, it’s the annual budget, not an inter-departmental war.
4. If it’s not broken, don’t fix it. Often, companies will change the technologies and processes they utilized in prior years when entering into the budget process for the current year. However, if the company has systems and processes that managers think work well for them, try refining and repeating those activities rather than overhauling the tools and processes that worked well in the past. Certainly, within a company’s lifetime, there will be times when an overhaul of existing tools or a switch to new tools is necessary. The best organizations carefully plan for these changes and have a roadmap to roll them out effectively. Be sure to have a solid business case for why the company needs to invest in new tools and stick with what works if it’s working well.
Leading organizations start their budgeting process later rather than drawing out the process through a lengthy series of budget drafts and negotiations. Finance leaders in these companies know how to steer the process and bring all parties to the table in good faith so that the budget is less of a battle and more of a battle plan that the entire enterprise can rally behind. With their budgets done in 25 days or fewer, these companies can get back to value-added activities much more quickly than their peers and competitors.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.