Time Concern

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Discussions on the budget process eventually turn to the length of time it takes, or that it perhaps never ends. There are reasons, some value-added, for the number of iterations and variation in planning horizons. There are also healthy debates on the timing of when the budget becomes out of date leading to scenarios on its refresh or use of rolling budgets.

Viewpoint A

Summary: Many feel that the budget process takes too long or involves too many iterations, and they question the value derived from the numerous iterations. A reason to perform multiple iterations would be changes in assumptions or business conditions which then require a change to the budget or an evaluation of multiple scenarios. Another significant issue is the definition of when the budget is complete. Moreover, assumptions used in the final budget may no longer be accurate by the time the budget is finished. More...

Viewpoint B

There have been some major changes to the way all Federal Government organizations have to perform the budgeting process, due to the introduction of the President’s Management Agenda (PMA), which mandates the idea of Budget and Performance integration. Each agency has to provide (generally) 5 year Strategic Plans to be reviewed along with 5 year cost estimates on all of the programs that are being run or proposed. More...

Benchmarks, Resources, Recommendations, Implications

Viewpoint A

Overview A significant feature (and complaint) about planning and budgeting is the length of time involved in the process. Many feel that “it takes too long” or involves “too many” iterations, and they will also question the value derived from the numerous iterations. The involvement of people at each organizational level drags out the process. In addition, the budget process also requires a significant level of effort from participants. Many of these participants are not “budgeteers” – rather, they are operational managers who have significant demands for their “real job” but must also meet the requirements of the budget process.

Another significant issue is the definition of when the budget is complete. Although there is a “final” budget, the estimates/projections are likely tracked and revised over the course of the fiscal year. Some organizations are opting for a less formal process that involves performing a periodic (e.g., monthly) rolling forecast, so numbers are more current and are always changing. Under such a scenario, the planning and budgeting process is never complete.

Iterations A typical feature of the planning and budgeting process is occurrence of numerous iterations (or versions) of the budget. Iterations typically occur as the budget is built up from the lower levels of the organization and up the organizational hierarchy. At each organizational level there may be a review, approval/disapproval, and/or adjustments to the budget. This cycle continues up the chain until the final budget is approved. Decisions/changes made at a higher level are then filtered back down the chain. These changes may involve adjustments to specific line items (e.g., reduce travel by $10,000) or broad changes (e.g., reduce overall budget by 5%) that must then be implemented at a lower level of the organization. These higher level decisions may be made without a full understanding of the impacts they will have at lower levels of the organization.

Another reason to perform multiple iterations would be changes in assumptions or business conditions which then require a change to the budget. The iterations may also require building multiple scenarios to capture a range of assumptions and projections. Some iterations may involve significant revisions to numbers while other iterations may involve only minor adjustments.

Numerous iterations of a budget can be helpful in refining projections/estimates and improving accuracy. However, a common complaint is that there are too many iterations in the budget process. From this perspective, iterations may be good to a point, but too many iterations require additional effort and lengthen the process. In addition, there is an assumption that each iteration improves the budget when that may not actually be the case.

Any discussion about the multiple iterations of a budget assumes that there is a “right” number of iterations and that improved accuracy achieved from an iteration is important to the final budget.

The issue of iterations is a subset of a discussion regarding the planning and budgeting process. Complaints about the process include: there are too many people involved in the process; people get in the way of the process; the process is too long; or people don’t add value to the process. [Should be discussed in detail in the Process topic]

Timeliness of Data and Assumptions Another complaint about planning and budgeting is the limited useful life of the final product. Data (e.g., cost rates, performance information, etc.) and assumptions used in the final budget may no longer be accurate by the time the budget is finished. This is especially true the further out the budget goes; the first year may be reasonably accurate, but time periods further out are likely to be much less accurate.

Another issue is the availability of data needed to develop the budget. Depending on the timing of the budget process, the last complete fiscal year of data may be at least 6 months old. More current data would help make estimates/projections more accurate. (rb)

Viewpoint B

Overview When you speak with professionals who have responsibility for working with the budgeting and planning processes, one of the first things they will say is “I’m busy and in the middle of the budgeting process.”

There could be many different reasons why your budgeting process takes too long. It could be due to anything from incompetence to natural disasters, but in all likelihood there are easily identifiable areas where timeliness and possibly even data quality start to become issues. There have been some major changes to the way all Federal Government organizations have to perform the budgeting process, due to the introduction of the President’s Management Agenda (PMA), which mandates the idea of Budget and Performance integration.

In addition to providing guidance to Congress with regards to current operational and financial performance in the budgeting process, each agency has to provide (generally) 5 year Strategic Plans to be reviewed along with 5 year cost estimates on all of the programs that are being run or proposed.

Performance Budgeting As if the budgeting process for the Federal Government weren’t convoluted and lengthy enough, as of 2001, the President introduced the PMA for all Federal Agencies. In addition to the normal budgeting process (see Process), each agency is responsible for providing evidence to Congress proving the efficiency and effectiveness with which the budget was spent the previous year. While the financial information is in the Financial Management Systems (FMS) of most agencies, there is a need to analyze how this data links with the actual performance of the agency. There are several factors that can lengthen the time it takes to obtain answers for these questions: 1. Data Quality; 2. ABC or Other Cost Assumptions; or 3. Analysis.

  1. Data Quality – (see Data Management and Relevance) – Suffice it to say, if you don’t have good data that has been logically formatted to link with the Process Flow Maps, there will be multiple iterations of the Budgeting Process required to get to a version of the budget that people can both trust and accept.
  2. ABC or Other Cost Assumptions – (see "The Closed Loop - Implementing Activity-Based Planning and Budgeting") – As discussed in “The Closed Loop”, Activity-Based Costing is the only way to completely determine the costs associated with performing the duties of an agency. Once you understand the “true cost of doing business”, it becomes much easier to determine who spent the funds, benefited from the funds and ultimately what value was driven from those funds spent to the stake holders or customers of that agency. ABC can make this process lengthy because of the level of detail and effort that is necessary to do it correctly. However, if the benefits outweigh the detriments in your particular case, then this process can be very valuable. This cycle can also be shortened tremendously with current COTS systems (see Tools) in the market place today. Of course, not every agency is complex enough nor has the political culture (see Politics and Gamesmanship) to implement Activity-Based Costing. For these agencies, many of the tools (see Tools) on the market allow the use of cost assumptions for the values that would be provided by ABC. While less accurate, having the right people running this exercise with an eye towards accuracy can make this process just as effective. Figuring out which is correct for your organization is best determined by who runs your Budget Committee in Congress and what he/she wants to see.
  3. Analysis – (see Analysis) – When you ask, “What would you like the ability to do more of in the budgeting process?” to just about any budget professional, they will say “analysis. ” Finding the time for this piece of the puzzle is already difficult, but it is the only way to properly run a Performance-Based Budget. Between pulling all appropriate FMS data together and mapping that to the Performance data, plus being able to do analysis on this data set, truly makes this last step a severe headache. Having a well designed COTS system (see Tools) that automates many, if not all, of these processes can cut down on the manual time spent “preparing for the analysis” and allocate the time to “doing the analysis.”

Benchmarks

A leading practice is to complete forecasts in 3 days.

Business Drivers

  • Whether the business entity has eliminated the annual budget process.
  • Frequency with which the business entity performs the activity "prepare forecasts."
  • Frequency with which the business entity performs the activity "prepare budgets and plans."

Leading Practice Statements

  • Define budgeting policy and related procedures to be used across the organization.
  • Share allocation rules and utilize modeling tools to support "what if" analysis.
  • Rationalize and simplify budget content to reduce budget complexity and thereby improve efficiency of the process
  • According to APQC research, high performing companies prepare annual budgets in less than 45 days, while low performing companies take longer than 90 days to prepare annual budgets.
  • Based on OSBC research, decreased planning, budgeting and forecasting cycle times create better business outcomes. Assumptions about the business environment or market behavior made 90 days before a budget is completed are much more likely to be incorrect than assumptions made only 30 days before the budget is due. In addition, decreased cycle time leads to decreased process cost.

Source: APQC OSBC Research 2005

Metrics

  • Cycle time in days to complete the financial forecast.
  • Number of FTEs for the process "perform planning/ budgeting/ forecasting" per $1 billion revenue.
  • Total number of FTE days to complete the budget cycle.
  • Number of budget versions produced before final approval.

Resources

  • Your input is welcome here.

Recommendations

  • To streamline the planning process, consider defining the budgeting policy and related procedures to include:
    • Use rolling, flexible budget instead of annual budget especially for volatile business environments.
    • Streamline chart of accounts, number of cost centers, number of accounts, approval cycles, and a high degree of standardization across charts
    • Integrate forecast and measurement processes
  • Increased frequency can be achieved by focusing on business drivers and using algorithms rather than conducting line by line financial planning.

Implications

Definition: “Time Concern” is the grouping of items for planning and budgeting that captures the concerns for the length of time and effort that it currently takes to complete the planning and budgeting process. The following are bullet points (in no particular order) generated by the group relating to time concerns:

(1) Budget “making” requires lots of effort (2) Just give me my budget (3) Budgets get “done” – they happen no matter what (4) Implies that accuracy matters (5) Implies a lack of understanding of the reason for the iteration (6) Too many iterations (7) Iteration may the whole point of the process (8) There is a right number of iterations (9) Iterations varies with organization levels (10) Iterations are bad (11) Iterations are good to a point (12) Budgets have limited useful lives (13) Implies that iterations improve accuracy (14) Full redo vs adjustments (15) Keeps window open for new business inputs (16) Keeps window open for new business decision (17) Don’t wait for things to happen (18) No good time to reorganize – should someone mandate (19) Continued change in targets (20) Budget timeline does not meet needs (21) Due to length of the process (22) People don’t add enough value to the process (23) Budgeting takes too long (24) There is not a process (25) The process needs “accepted” milestones (26) How “process” flows, affects what people think of it (27) People get in the way of process (28) Budgets “transform” dollars to programs and programs to dollars (29) Need tool to translate programs to money and vice versa (30) Some budget offices delegate down management & absorb centrally the accountability (31) How do top level adjustments affect lower level decisions (32) Need to adopt a more streamlined process (33) Need to rework the schedule for completion (34) First year budget is ok – 3-5 out years are out of synch (35) Rate or contracts may be out of date (36) What made it (budget) out of date (37) Performance (data) may be out of date (38) Out of date: Short Term vs Long term (39) Takes too long due to “layers” (40) Budget out of date before it’s even finished (41) The definition of when a budget is “finished” is incomplete (42) Budget time line is not aligned with available data


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