Year-end budget planning for the coming year makes everyone grumpy at many companies. The desire to describe everything as accurately as possible leads to massive amounts of data that must be produced, made plausible and processed. The Controlling Department puts in overtime. The Departments keep providing more and more numbers. When the plan ultimately comes about, parts of it are completely outdated because material assumptions have already changed again. The shortcomings in this type of typical budget planning are quickly obvious: it takes too much time, it isn't very effective, and it has a short half-life.
Finding Your Own Way: Sustainable Planning
Yet there have long been methods of making a plan an efficient instrument for managing your business. What you need is to develop a customized planning strategy. It should go into detail only where such detail really makes sense, and it should be flexible and easy to adapt at all times. But how can you separate relevant information from irrelevant information? How can you take project effects into account? How can you incorporate influences from the market environment or the political world?
The first task is to address the existing problems in a structured manner. For example: The company's strategy is not taken into account in the budgeting process. The amount of resources used is enormous. Organizational interfaces are not clarified. The same system is used to prepare the ideal scenario. This will allow you to establish fundamental parameters for optimizing your planning process.
Implementation occurs in five steps:
- Establish strategic guidelines: Your company's strategic goals are broken down into guidelines from the top down for each of the operating units. These could be market share goals, earnings ratios or key account volumes, but they could also be strategic core values for a new line of business, a new location, etc.
- Draw up a basic plan: The operating units prepare a basic plan - the "base case" - from the bottom up. The focus is on the question of where there are significant gaps between the current situation and Management's strategic guidelines.
- Plan earnings-critical positions in detail: The basic plan is only fleshed out with respect to earnings-critical positions and situations where significant gaps have been discovered. The key question is what actions can be taken to achieve the core goals - a key factor in the planning process, for these actions will be the central task of management in the operating units in the coming year and the basis for reporting and controlling.
- Simulate scenarios: What influence will ups and downs in the economy have? What effects will different actions have? Questions like these can be answered by simulating various scenarios. This will show how sensitively the company's success reacts to changes.
- Readjust if necessary: As we all know, things seldom work out the way they were planned. Purchase prices change; a new law is enacted; the start-up of a production line is delayed. For planning to be useful as a management tool, it must be adjusted constantly. And it will soon become clear whether the company is still on track.
Practical Example of Sustainable Planning
Fortunately, it is not always necessary to radically change the entire planning process. What is important is to adjust the right parameters, as shown by this example: A company with more than 80 subsidiaries established a program to increase profits through 50 packages of measures, some of which were planned centrally and others locally. But to implement this using their existing planning procedure would have taken forever.
In compact workshops with Controlling, Management and the Business Units, potential problems in the budget planning were first anticipated; their causes were then determined and priorities were set. The first consequence was that the divisions had to do much less planning at the cost center level because binding instructions were imposed from the top down. On the other hand, much more time was spent on planning profit-critical measures. To do so, layers (the company's own data layers in the planning software) were specially brought in for measures to be taken over wide areas. A simple device that is highly effective: on the one hand, the layers made concrete planning possible at the local level by the individual units. At the same time, the effect of each measure on each layer could also be seen at the level of the entire company.
In a Nutshell
Many managers think that switching to modern planning methods is too risky, because it would mean changing a tried-and-true process. But it's really worth it. Added value is created when the plan is an effective tool leading to even greater success for the company.
A longer version of this article by Thomas Mundus and Simon Haas was published on January 5, 2015 in the Frankfurter Allgemeinen Zeitung under the heading "Der Betriebswirt".
To read the article in German in the online version of the FAZ, click here.