3 steps for avoiding illusory budgets


Richard Barrett

Content Creator

For me, the first quarter of a new financial year is always the most worrying, my view being that if you are not hitting your numbers after the first three months, you are unlikely to make up the deficit in the remaining nine months. You can try to delude others–and possibly even yourself–by reforecasting a miraculous “hockey stick” trajectory in sales and profits for the second half of the year, but you know it is never going to happen. You also know that the longer you leave it, the worse it is going to become.

But how did you come to get stuck with such illusory targets in the first place? And how can you avoid that happening in the future? Here are three best practices to make the planning and budgeting process become more effective, and prevent you getting saddled with unachievable targets.

1. Establish expectations early

It is one thing to have stretch targets, but in my experience, rational beings do not set themselves unattainable goals. More often than not, such goals are foisted upon you by some top-down mandate–and stupidly you accepted them like a lamb to the slaughter. You can try to stand your ground, but in my experience, simply arguing back and forth about the numbers can be a career-limiting thing to do. A better approach is to go into any discussion about quotas and targets armed with the facts, and a model that shows exactly what has to happen in order to reach these top-down objectives. Just being able to show that 20% year-on-year growth means having to grow at double that rate in the final quarter will immediately give people reason to stop and think. Better still, have the model start from market demand and work back through market share and prevailing prices before getting immersed in internal considerations. Because then the discussion will soon go beyond the numbers and focus on why market share is expected to grow or why selling prices might not increase the way they need to hit the top-down target. Everyone gets to understand the enormity of task ahead and hopefully, you walk away with more realistic targets.

For such discussions to be of value, they need to take place well before the annual planning and budgeting cycle kicks off. The ideal time is immediately after the end of quarter two as that gives those responsible for setting the top-down targets plenty of time to develop a deeper understanding of the potential of the subsidiary or business unit, before quantifying their expectations. Some might say introducing yet another step into the planning cycle just makes more work. But preparing a high level model that gives insight into future financial performance is not exactly an onerous task, and involves substantially less work than preparing a complete budget. In fact, those already working with rolling reforecasting models will have very little to do. Neither does it take much time. If all the information is provided ahead of time, the majority of these pre-alert reviews take no more than an hour or so and can easily be done with a conference call.

2. Recognize each business unit’s role

Good top-down goals recognize that different business units and subsidiaries play different roles in the organization, those operating in low-growth markets typically being the cash-cows while those in emerging markets consuming cash to grow their presence. Exactly the same logic holds true for products in a product portfolio or sales territories inside a sales organization. The important thing is that each business unit is assigned a role, and that these are transparent to everyone in the budgeting and planning process. That way top-down expectations can be tailored to individual businesses, with some focusing on cash generation while others concentrate on growing market share, rather than being spread evenly across all business units like peanut butter.

3. Allocate resources based on role

By allocating business units, product groups, or geographic regions to roles, and giving them highly descriptive names, such as “cash cow” or “growth engine”, will soon get across the message that expectations are not homogeneous, and that budget submissions should not simply reflect last year’s numbers plus inflation. Instead, those business units that are in growth mode will be fully funded while those with limited opportunities for growth should focus on incremental improvements in productivity and profitability.

Having illusory budgets benefits no one. All too often it is the business unit head who fails to hit their targets that gets most of the blame. But I would argue that the corporate team responsible for the top-down guidance should also be held responsible. Foisting unachievable targets on business units can be the first step on a slippery slope that leads to issuing an earnings warning that wipes millions off the value of the company. Reconciling top-down and bottom-up approaches to planning and budgeting should not be a battle that leaves one party bloodied and the other victorious. It should be a collaborative process to check whether the financial targets for the coming year are plausible and to align resources between the various business units. Everyone should be a winner.

Aligning and optimizing plans and forecasts across the 16 countries in which Aviva operates is just one of the challenges that led Darren Craddock, Director of Planning and Forecasting, to choose Anaplan. With the solution in place, Darren and his team now spend far less time generating forecast leaving more time to engage with business units, exactly as it should be. Click here to watch Darren talk about their implementation in this recent video.