Most of the challenges faced by the companies in your article “Freed from the Budget” (September) are not inherently budgeting issues. Inability to set hard targets, overuse of spreadsheets, and trying to use the budget for analytics are management, process, or technical issues. In our experience, a budget is a process used to coordinate the activity of a large organization by directing the deployment of resources. It is one part of an effective financial performance management process.
The real issue is delivering an effective financial performance management process. Here are a few suggestions:
• Align process to purpose. Do not mistake a budget for a forecast. They are different things. One is for prediction (forecast), the other for direction (budget).
• Separate target setting from budgeting. Target setting is hard and risky. Push too hard or too little and you have problems. Like forecasting, target setting is not a part of the budget process; it is done in preparation at a higher level.
• Have a process to redirect funding (budgets). Most industries have to react to changes. A quality budget process allows for redirecting funding during the year based on input from the forecast and management.
• Develop contingency plans. In a volatile environment like the current one, companies should develop coordinated plans for dealing with market and economic changes (favorable or unfavorable). This type of scenario planning and coordination generally cannot be accommodated in a forecast process.
One of the toughest things executives do is to get their company working in one direction. An effective budget can be a critical tool for that effort. Like the company mentioned in the article, businesses need to forecast, set targets, and allocate resources. The last of which by any other name is a budget.
Deloitte Consulting LLP, Finance Practice
Financial budgeting is much like weather forecasting — often unreliable but never without a tortured explanation for the variance from plan. Whole armies of accountants work for months drafting and redrafting annual operating and capital budgets. Imperious (usually ego- and not fact-based) decisions come from on high and another round of crunching takes place until egos are salved and the process gamed to a point beyond any rational utility.
After the budgets are approved by generally ill-informed management, the analysis process begins, and so does the scapegoating. Fire the sales staff for not making unrealistic sales projections. Fire the HR person because of staff turnover, payroll tax increases, and so on. Fire facilities management for not predicting sometimes whimsical staffing increases or decreases. Fire the tax department for not predicting tax-law changes. Fire the CFO for not predicting FASB rule changes or reporting requirements. And on and on.
All sheer folly perpetrated by those who need some content for their otherwise irrelevant management positions.
James P. Crumlish
Sure, budgets can be silly at times, built for easy-to-achieve incentives. But that does not take into consideration the many companies that take goal-setting seriously. Has the author not heard of the term “stretch budgets” or “balanced scorecard,” where we use not only financial budgets but other key qualitative factors (for example, customer service and product quality) as part of the compensation?
We all know that long-term forecasting and budgeting can be difficult, with business dynamics changing regularly, but we also can have contingency plans to accommodate these changes. All the buzzwords we use in budgeting, such as “responsibility accounting,” “zero-based budgeting,” “stretch budgeting,” and “balanced scorecard,” are good only if we practice these fundamentals in the real world.
Ronald F. Hierbaum
College of Business & Management
Long Beach, California
The Buzz on CFO.com
• In an August 28 article, Obiamaka Madubuko and Adam Taylor explained the Securities and Exchange Commission’s new rules requiring public companies to disclose their use of so-called conflict minerals — tantalum, tin, gold, and tungsten — that originate in the Democratic Republic of the Congo or an adjoining country (“New SEC Rules Target Conflict Minerals, Supply Chains”). The rules were mandated by the Dodd-Frank Act, and many companies have complained about the costs of compliance, which are expected to be huge. But reader Chuck Blakeman offered a different perspective, calling the legislation “the greatest proactive tragedy committed against Africa by the West in 100 years.” “Dodd-Frank,” wrote Blakeman, “has burned down the entire mining industry of 10 million Congolese in the random hope that it might catch a militia or two in its path.” Criminals are the problem, argues Blakeman, not minerals.
• David L. Landsittel, chair of the Committee of Sponsoring Organizations (COSO), took exception to our August 29 article on enterprise risk management, “Why U.S. Risk Managers Should Take a Hint from the Rest of the World.” Co-authors John Bugalla and Kristina Narvaez noted that while most U.S. companies use the COSO framework for ERM, the rest of the world is fast adopting the ISO 31000 standard on ERM from the International Organization for Standardization. “Any organization that does business internationally should be using it for ERM guidance,” argued Bugalla and Narvaez. The ISO standard has several strengths that are lacking in the COSO framework, they contended. What’s more, some U.S. multinationals are using COSO in this country and ISO 31000 abroad, they pointed out, and “that is out of line with a core principle of ERM: a consistent approach to and treatment of all risks.”
But Landsittel said COSO doesn’t view its framework as being in competition with the ISO standard. “Risk managers should look at all available frameworks and other guidance in building an ERM program — tailored to their specific needs,” he wrote. The “key strengths” of ISO 31000 identified by Bugalla and Narvaez are also addressed in the COSO framework, said Landsittel, and he rejected the notion “that considering guidance from more than one framework would be detrimental to any ‘core principle’ of ERM.”