PLANNING FOR THE BEST
A focus on budgeting signals better performance than a focus on controls.
By Joseph McCafferty

Does your finance organization focus on budgeting and planning, or cost management? While the two are not mutually exclusive – the best firms focus on both – emphasizing one over the other could have a dramatic impact on the overall effectiveness of the function.

A new study by the American Productivity and Quality Center (APQC) finds that finance organizations that focus on planning, budgeting, and forecasting as key elements of their business strategy are higher performers in all areas than those that focus on cost accounting, controls, and cost management. In general, high-performing companies spend a higher percentage of their resources on budgeting and planning (B&P), but when compared with poor performers, they spend less overall on finance.

The top 20% of participants in the study spent 29 US cents for each US$1,000 of revenue on budgeting, planning, and forecasting, making it their highest cost. They spent just 25 US cents on cost accounting, controls, and cost management, and 24 US cents on evaluating and managing financial performance. The worst performers spent the most on controls and cost management (US$2.47) and still spent US$1.81 on planning and US$2.08 on managing financial performance.

“High cost does not equal effectiveness,” says Lisa Higgins, chief operating officer of APQC and co-author of the report. She says companies that spend a higher percentage up front on B&P have lower overall costs across the board in finance and faster cycle times. For example, the top performers complete the budget cycle in 30 days, while the bottom 20% take 90 days. High performers are also more likely to use rolling forecasts and link the budgeting process to strategy and compensation.

Of course, higher spending on controls and cost management is often a symptom of deeper problems rather than a cause of them. Companies that spend more on planning probably have the luxury of doing so because their financial house is already in order.