What’s inefficient, hinders corporate progress, and stifles productivity? You guessed it—the financial budgeting process.
In an era where the modern CFO is steadily emerging as a strategic force—armed with real-time data and game changing insights—it’s clear that old-school, static budgeting procedures just don’t make the cut. An active budgeting process, on the other hand, is collaborative, comprehensive, and continuous—and can increase buy-in and accountability throughout the organization.
So why do business finance professionals today still struggle with traditional financial budgeting? We’ve broken it down to the following four reasons based on the Harvard Business Review’s white paper, “The Annual Performance Trap: Why the Budgeting Process Must Change.”
1. It’s just too inefficient. This is a process that takes too long, depletes too many resources, and results in far too many wasted hours (and tears).
2. It’s obsolete. With their annual nature and strict inflexibility, budgets are often outdated shortly after they are created. Despite the lack of real-time data in a traditional budget, financial goals are set through this model and departments are forced to try and hit outdated numbers.
3. It doesn’t motivate the right behavior. Traditional budgeting fosters a culture of bureaucracy over collaborative financial teams. Managers often pad their budgets for fear of not receiving enough money, creating a cross-functional competition for expanded budgets.
4. It’s out of sync with the overall strategic plan. Budgeting always pushes financial performance over strategy. Department managers are under pressure to meet budget numbers and stay within an often unreasonable and ill-advised set of parameters that were set without the ability to adjust.
The annual budgeting process was designed nearly a century ago and created to serve three main purposes: coordinate the organization’s financial activities, communicate financial expectations, and motivate managers to act in the company’s best interest. But just like society has evolved from the horse and buggy to electric cars and Teslas, old processes need to progress as well.
Our CFO Indicator Q4 2016 report reveals that while 85% of CFOs say their teams have direct access to the financial and operational data needed to generate accurate reports, it is the non-value-added tasks—like data gathering, verifying accuracy, and formatting reports—that take time away from the strategic analysis desired by top management and other stakeholders. Most CFOs also cite data integration as the biggest technology hurdle to gaining actionable reporting information, given the increasing need to report on both financial and operational data typically housed in disparate, unconnected systems. Read our other CFO Indicator reports here.