Fudge Budgets

New B&P systems may put an end to padded projects.


As a recent CFO survey shows, getting employees to actually use budgeting and planning software can be tricky. Indeed, in some cases, up to half of B&P software seats go unused. Even if workers do embrace a whiz-bang B&P application, it doesn't necessarily mean they'll make good budgeting decisions.

The awful truth is, budgeting is still dominated by some very bad habits. One of those habits, "land-grabbing" is almost epidemic among business-unit and department heads. In land-grabbing, employees reduce or raise revenue predictions to make sure they'll hit forecast targets. In some cases, department heads also pad budget expense lines to protect against changes in market conditions.

Whatever the method, this gaming of the system can make a mockery of the budgeting process. Sellers of B&P software say they've designed their programs to combat this worker tendency for fudging budgets. Most B&P applications, for instance, enable senior managers to revise, update and redistribute budgets and plans in reaction to material events. Hence, employees know a budget request can be revised if conditions change. In theory, this feature also makes for dynamic budgeting — long a dream of finance executives.

In theory. But the finance executives who spoke to CFO say that, although B&P software makes dynamic planning and forecasting possible, they probably won't move to rolling budgets anytime soon. In fact, a recent survey by Hackett Benchmarking and Research indicates that over 40 percent of companies still consider budgeting and planning primarily a calendar-bound process.

"We're still such a quarterly focused business," says Bob Vesely, CFO at Advantage Sales and Marketing LLC, based in Irvine, California. "We're a cyclical consumer products industry, and most of our volume is in the fourth quarter. Impact of the first quarter is tough to gauge until you're close to it."

Instead, Advantage uses its budgeting software — the Comshare MPC system — to create an official annual "base budget." The company also maintains a real-time "working budget," and employees are encouraged to update that budget as business conditions warrant. But, Vesely notes, "We haven't gone to a full rolling budget just yet, though."

Full rolling budgets sure would be nice. Michael Collins, vice president of operations at McCord Travel Management in Chicago, says that, while budgets are important, the budgeting process can be an exercise in futility. "We spend a fair amount of time building a budget that is obsolete by the time the end of the year rolls around," Collins explains. "Then you stress out all year because your actuals don't match budget."

Collins says McCord Travel's budgeting software, Hyperion Performance Metrics, does help him better explain the disparity between budget numbers and actual numbers. Nevertheless, he doesn't foresee a time when the fixed, calendar-based budget cycle will go away. He'd sure like to, though. "That would be grand slam for us if we could do it."

Still, finance executives say that B&P software has made it easier to manage the "granularity" of data associated with various budget line items. At Silicon Graphics Inc., for example, the travel expense line item is one line item. But the headcount-related budget items are broken down into current employees (with names and salaries listed), employees who have been hired but haven't yet started, (again, with names and salary listed), and open positions (with salary bands).

These programs also provide an online mechanism for employees to attach accompanying written explanations or documentation to back up their budget requests. Many software programs also allow finance executives to pre-populate the budgets they send out with fixed numbers or to cap budget line items ahead of time, thus eliminating the padding problem altogether.

"You have to pick your battles, and you can limit the degrees of freedom" argues Jeff Osorio, vice president of finance operations at SGI, in Mountain View, California. "If 65 to 70 percent of my budget is salary and benefits, and facilities and depreciation take it up to the 90 to 95 percent range..., Well, there's very little room for fluff with the remaining 5 to 10 percent of the department budget." Getting rid of the fluff is what good budgeting is all about.


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