Collaboration can keep hidden costs from sinking FP&A initiatives

The hidden costs of budgeting and forecasting are preventing companies from realising the full potential of recent investments in financial planning and analysis (FP&A) improvements, according to new research by member-based business advisory company CEB.

Four in five companies are realising less than half of their potential productivity from budgets and forecasts, according to a recent review of CEB members’ data. And a survey of 138 global FP&A directors found that budget and forecast improvement initiatives delivered an average of 51% of the cost savings and 54% of the value capture the FP&A directors had expected.

“Finance teams have made limited progress over the past five years,” said Anna Kipchuk, the CEB senior director who performed the research. “There have been a lot of initiatives to automate processes and increase accuracy, but these have yielded very little of the expected value of cost savings that teams have set out to earn.”

Kipchuk compares FP&A costs to an iceberg. The corporate centre costs are above the water and dwarfed by the massive FP&A costs shouldered by business-level finance teams, management and functional leaders. Unless these hidden costs are addressed, FP&A improvements can have limited effects.

“The business finance team, and actually management and operating staff dispersed throughout the business, end up bearing about 90% of the costs of budgeting and forecasting,” Kipchuk said. “And so unless we make a conscious effort to reduce the burden on the business, we’re not making any significant improvement.”

But many FP&A process improvements have been aimed at the corporate office, Kipchuk said. So perhaps it should be no surprise that budgeting and forecasting improvements have not delivered the desired results.

According to FP&A directors, 21% of internal business stakeholders say budgeting is a valuable activity, and 35% of stakeholders say forecasting is a valuable activity.

Other reasons for dissatisfaction with FP&A, according to Kipchuk, include:

• Finance executives feel like they are producing information that is not clearly matched to key decisions that are critical to organisations and does not produce a valuable outcome.
• A significant portion of budgeting and forecasting work is done for controls and assurance, not because leadership teams plan to use the data to drive decision-making or resource allocation.
• Budgets and forecasts are used as tools for management initiatives in cases when it doesn’t make sense to use them. Although CEB research shows that using budgets as a basis for incentives has no impact on process productivity, 90% of FP&A teams surveyed report using the budget as a basis for incentives.

Leading companies, according to CEB, avoid using budgets and forecasts as catch-all tools for decisions they are not fit to support. In addition, top companies don’t rely only on corporate finance cost benchmarks when they plan process improvements, according to CEB, because process complexity needs to be tackled in the business, not just the corporate centre.

Collaborative discussions between corporate finance and the business units can help reduce waste in local business planning, Kipchuk said. Leading companies will accept a difference in the level of detail of corporate and business-level budgeting and forecasting, Kipchuk said, as long as the data the business units are producing are actionable and drive business decisions.

Corporate finance can teach local management to be more pragmatic in how it treats the level of detail, and can help establish clear parameters for when local budgets and forecasts can diverge from corporate standards, Kipchuk said. Afterwards, it’s important to regularly reconnect and review changes in local management’s information needs.

“The world will not stand still,” Kipchuk said. “People’s needs for budgeting and forecasting will change at the corporate centre, and they will frequently change at the business level as the business evolves.”

Related CGMA Magazine content:

“Boot the Budget? Why Rolling Forecasts Might Make More Sense”: Traditional budgeting practices are keeping finance departments from remaining relevant in their companies, consultant Steve Player, CPA, CGMA, says.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.