APQC is engaged in current and ongoing research on planning, budgeting, and forecasting through our Open Standards Benchmarking Survey on Planning and Management Accounting.

As part of our research, we look at both key performance indicators, as well as practices data, about these processes, and what are the drivers of improving these processes. Since it is that time of the year for finalizing and approving many organizational budgets, we have been recently engaged in again scrutinizing the KPIs and best practices of the budgeting process. Examining this process more closely, our research shows that it can be a rather time consuming and expensive one, with companies taking anywhere from about 1 to 2 months out of the year in cycle time to complete the annual budget, during this time producing between 4 and 8 budget versions before final approval, and dedicating somewhere between 1.5 to 7 people per $1 billion revenue to do the planning, budgeting, and forecasting process. APQC finds that organizations on the bottom end of the performance spectrum are investing a lot of people hours and cost into this process.

APQC has published many articles about how to try to improve the planning, budgeting, and forecasting processes, and I have included the following below as reference for interested readers:

Cost Isn’t Everything: Planning, Budgeting, and Forecasting

Cycle Time to Complete the Annual Budget

However, for a paradigm shift, I encourage you also to think about alternative approaches to budgeting, such as those listed below:

Alternatives to Traditional Budgeting: Zero-Based, Driver-Based, and Rolling Forecasts

And, just as a general rule for finance and any process, we should always strive to think about not only ways to do these processes better, but sometimes even whether they should be done (or at least done by ourselves) at all. For instance, there have been some organizations that have successfully eliminated the budgeting process altogether, as an example. And as my colleague Steve Player says, why try to improve what you can eliminate?

For example, Park Nicollet Health Services, a nonprofit integrated health care system headquartered in Minnesota, is one organization that has eliminated its budgeting process entirely as part of its Lean transformation. The previous budgeting process was onerous, involving about 240 forty operational managers in addition to the finance and accounting function. The finance and accounting function would combine budgets from the operational managers and management would inevitably return the budgets to the operational managers to “try again.” Requiring two such passes, the budgeting process that should have taken 4.5 months took about 7 instead—with Board approval coming well into the new year.

The budgeting process was problematic at the organization for a number of reasons. Budgets were a negotiation between the COO and the responsible executives but a poor predictor of actual performance. Additionally, the cumbersome process did not allow it to be adjusted for the changing environment. With executives’ bonuses primarily based on performance against budget, many leaders were open to change.

As part of its Lean initiatives, the CFO looked for ways to improve finance, and began examining its processes and mapping the value streams. The organization decided to eliminate its budgeting process entirely and instead:

• base goals on maximizing performance potential,
• base evaluation and rewards on relative improvement with hindsight,
• make planning a continuous process,
• provide resources in response to need and market opportunities,
• coordinate company activities according to prevailing customer demand, and
• set base controls on effective governance and performance indicators.

The finance and accounting function still provides management with monthly financials, but holds them responsible for their quarterly performance compared to the previous quarter and the same quarter the previous year. Much like rolling forecasting, finance and accounting re-forecasts each quarter for the upcoming six quarters.

Instead of focusing time on setting budget needs and justifying variances, employees now have the bandwidth to focus on Lean management. And instead of being evaluated for their capacity to meet their budget, employee evaluations focus on continuous improvement in process performance. Annual bonuses are now based upon relative financial performance, instead of budget. Overall, this organization found this effort to eliminate budgeting to be a great success in eliminating waste, empowering employees to make thoughtful decisions, and focusing both finance and accounting and the greater organization on work that matters.

APQC members can read more about this organization’s journey in Eliminating Budgeting in Healthcare: Park Nicollet Health Services Case Study and stay tuned to APQC’s financial management research for more ongoing research about how to plan, budget, and forecast faster, more efficiently, and with better results.