Magazine article Financial Management (UK)

The Search for Prophet Ability: Accountants Must Start Giving Line Managers the Information They Need to Make Decisions in Real Time, Writes Richard Barrett. He Outlines New Approaches That Can Help Them to Achieve This. (Technology)

Magazine article Financial Management (UK)

The Search for Prophet Ability: Accountants Must Start Giving Line Managers the Information They Need to Make Decisions in Real Time, Writes Richard Barrett. He Outlines New Approaches That Can Help Them to Achieve This. (Technology)

Article excerpt

Given that financial instability is a fact of life and business success depends on our ability to stay ahead of the game, isn't it strange that we're still using budgeting methods that are rooted in the early 20th century?

Budgeting was invented around 80 years ago, when competition was much less fierce, globalisation was non-existent, consumer choice was restricted and the demand for goods and services was far easier to forecast. By contrast, today's climate of rapid change means that traditional methods of planning and control simply cannot provide the information that managers need in order to make sound decisions.

Although budgeting is designed to align the resources of an organisation with its strategy, the process is still dominated by finance and too focused on cost and control to be effective. There is an increasing demand for finance departments to advise and support line managers with forward-looking information that goes far beyond straightforward financial metrics to provide a deep operational insight.

The budget needs to become much more ingrained in the business, instead of a set of numbers that were probably out of date before the board signed them off. It should help the finance department to advise the business on how to improve performance, rather than simply reporting variances. In my firm's recent survey of CFOs in 200 of the UK's top businesses, more than 80 per cent of respondents recognised the importance of non-financial data when budgeting and reforecasting. But this is modelled outside the budgeting system in most cases, creating a disconnection from the financial budget and, ultimately, the potential for inaccuracy.

Line managers don't govern their responsibility centres by constantly checking their costs or reviewing the past. They typically focus on the handful of key performance indicators that drive their costs. The same thing happens when they prepare budgets. Because current planning and budgeting programs don't consider operational factors, line managers usually model and compute all the non-financial data that drives their costs in their own spreadsheets. They then simply cut and paste line item costs into a central budgeting application, which ends up containing little but "dead" cost data. This time-consuming practice makes many assumptions and it produces information that goes out of date quickly. It not only tells financial managers very little about what's actually driving costs; it also fails to give line managers useful and relevant information.

As well as requiring a budgeting system that incorporates non-financial data, firms need to be able to respond to the rapidly changing business environment. Finance departments have tried to improve the reliability of their forecasts with the fast dose, but it's doubtful that this has delivered the anticipated benefits. …

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