Companies and their Annual Budgeting

A new Accenture/Cranfield report entitled "Value through Strategic Planning and Budgets" has just been released, showing that corporations are moving away from the tradition of setting themselves annual budgets. This is in order to reduce their overall costs, improve forecasting and to better manage investor expectations.

The survey indicates that the move away from traditional annual budgets seems to help companies outperform their peers. Early movers' five-year share price growth has been 221% on average compared to 167% for others in
their sectors. Over ten years, early adapters outperform peers even more dramatically, recording average share price growth of 373% vs. 280% for the sector. The research has also identified that emerging technology is providing corporations with the tools to modify their budget processes.

"Companies are able to reduce their budget cycle time by 30% to 40% by adopting approaches to the budget process that are more in concert with their overall strategic planning," said Herman Heyns, partner of Accenture's Finance & Performance Management practice and an author of the study. Among these new approaches are rolling budgets, and in some instances, elimination of budgets entirely.

"Our study indicates that the budget process is obsolete given today's economy, resulting in documents that are time-consuming to produce, of little predictive value, subject to gamesmanship and, quite frankly, out of date by the time they're implemented," Heyns adds. "We found that companies are beginning to radically modify their budget processes and are thinking actively about approaches beyond budgeting."

"Three themes clearly emerged in the study," said Professor Andy Neely, Director of the Centre for Business Performance at Cranfield School of Management. "First, companies can no longer justify the time and effort they invest in the budgeting process; second, budgets have to be much more responsive, enabling nearly real-time tracking; and third, management must understand that budgets cannot serve as both control and motivational devices. Companies that understand this and act on it are poised to enhance their credibility and performance."

The research team interviewed representatives of more than 20 companies earlier in 2001, drawn from diverse industries and markets,including ABB, BP, Cisco, Credit Lyonnais, Electrolux, Ford, Shell, Skandia, and Volvo. These interviews were supplemented by discussions from over 30 senior analysts from major investment firms - Deutsche Bank, Morgan Stanley Dean Witter, Merrill Lynch, Prudential Securities, and William de Broe, as well as Standard & Poors.

All articles 2006-22 written and edited by Mel Crowther and/or Nick Thomas unless otherwise stated.