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This is the second of a 12-part blog series appropriately called The 12 Principles of Best Practice FP&A. These Principles are based on global research conducted with more than 700 organizations worldwide.
Principle #2: The best performing companies do a better job of identifying resources needed to deliver projects & meet plan results, and actually get those resources into the budget.
Many well-conceived projects that have the potential to drive desired outcomes wither and die on the vine. Why is that? The most common reason is that the project was not properly resourced to begin with. By resource we mean both money; and just as importantly, people’s time. This is often because the people developing or leading these projects don’t think it through and put pen to paper (but instead fall back on “We’ll just do it”).
The second common pitfall has to do with the calendar. The process of developing the strategy and the initiatives/projects to support it is disconnected from the budgeting process, and happens well before or after it. Keep in mind that no matter what’s said in an offsite meeting, the real allocation of resources happens in the budget process. So while executives may have stars in their eyes during a retreat and “commit” to a project; sometime later during the budget process is when real decisions about the allocation of resources actually get made. In the best performing organizations; however, the resources needed to execute projects that will drive results actually get funded in the budget.
The budget process has gotten a bad rep over the years, and more than one CFO I know is slightly embarrassed to admit her company even has budget (sometimes referred to as the Annual Plan). What we have to come to terms with is that until something else replaces your company’s budget or annual planning process, it remains where the “real” allocation of resources happens. Is that initiative to enter the new market funded? Is that project to increase employee retention though enhanced training funded? What about the program designed to speed up new product development? The short answer is “If it’s not in the budget, no.”
One challenge is that many Managers, while they may know their area of the business, have never actually built a project plan. It’s not hard, but it does require some training to learn how to establish milestones and dates, to break activities down into tasks and put them on a timeline, and most importantly to estimate the resources needed to fulfill all those activities and tasks to meet the key deliverable dates. As a side note, it’s not enough for a manager to “have it in his head” it needs to be documented so that it can be shared with others and become a tool to deliver results.
Another challenge is the typical budget process itself does a poor job of incorporating initiatives. The budget process is good at delivering a P&L, but it’s often impossible to identify where project spending has been included. For example, how much of the budget relates to the initiative to double the number of new recruits into R&D? How much relates to the initiative to shrink new product development time by 30%? How much relates to the initiative to increase productivity by 2% next year? Are those initiatives funded in the budget… if so by how much? What P&L line items are impacted?
From a budget process and systems perspective, project spending needs to be well documented, and translated into the individual General Ledger accounts they’ll hit. That’s where the rubber hits the road. We did this at Pepsi, and it was time consuming to do in Excel. The good news is that today there are much better options for leveraging technology to keep it all straight.
The last point to mention is that while the best performing organizations have mastered all that we have discussed here, it really is a case of progress not perfection. Start small, take one or two key strategic initiatives and bake them into the budget. Work out the kinks in your process, and expand over time.
In the next post we’ll take a look at how the best performing companies “staple” investment spending to driving operational results.