ADERANT
Easing the Pain of Budgeting: Best Practices for Law Firms
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Why is it that while everyone believes a
formal, iterative planning exercise is a sound business practice, we
only hear about the budgeting exercises that crash and burn? Harvard
Business Review said it best when they described the budgeting
process as “something that tends to conjure up in the minds of many
managers images of inaccurate estimates, produced in tedious detail,
which are never exactly achieved but whose shortfalls and overruns
require explanations.”
Evaluate your budgeting process by
answering the following questions.
Let’s face it—there are some painful
issues that managers and analysts confront in this process. Managing the
distribution, creation and consolidation of budget information,
particularly when there are multiple revisions or sets of assumptions,
is a tough task. Electronic spreadsheets have been deployed to help
facilitate the process, but they often magnify problems rather than
solve them.
Something has to change. For many firms
it is more than selecting the right tool. Sometimes the issue is more
fundamental—simply creating a budgeting process that works within the
framework of your organizational objectives. For firms of all sizes
reducing the cycle time to produce an effective budget represents a big
win.
A PricewaterhouseCoopers study found on
average it took organizations 110 days to complete the annual budget
cycle. They found the cost of this effort was $60,000 for every $100M in
revenues in the accounting department alone. When you include the
efforts of people outside of accounting, this figure could easily be
tripled or quadrupled.
Making Budgeting Less Tedious, More
Strategic
A key to developing a successful planning process is to match your
organizational capabilities and expectations. Carefully consider the
level of detail, the number of participants, business units and
geographies, interdepartmental dependencies, diversity of skills,
competency levels and individual roles. Two common approaches are
described below.
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Top-Down Budgeting: A high-level
target developed by top management and communicated down
through the firm. These budgets may be vague and include
generalizations such as increase revenue by 15%, cut expenses by
20%, or increase net income by 25%.
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Bottom-Up Budgeting: Operating
plans constructed by department heads at the bottom of the
enterprise and rolled up to derive firm-wide targets. These
budgets are rarely approved on first pass and are typically
developed without sufficient strategic guidance from upper
management.
Since neither of these approaches is
ideal, many organizations begin with a top-down target based on a set of
economic, strategic and market assumptions, but the actual budget is
developed in a bottom-up fashion. Look for solutions that help
facilitate the communication, management and reconciliation of whichever
process you adopt.
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Reduce the time to develop the budget.
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Reduce the number of iterations and
level of detail.
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Use budgeting productivity tools to
improve efficiency.
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Consider external, non-financial,
longer-term influences.
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Make your process dynamic so it can
adapt to changing business conditions.
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Strive for shorter planning cycles with
more time for strategy and analysis.
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Realize performance improvements by
honing in on areas of the business that are under-performing and
adjusting drivers and assumptions to refine ‘go-forward’
performance.
Set reasonable goals. Remember, it’s
about improvements in operational excellence, not about “budgeting for
budgeting’s sake.” Your business is fluid so your process needs to be
dynamic, iterative and participatory. The concepts of planning and
analysis are synergistic, not separate and distinct activities. Run
what-if scenarios to be better prepared for future possibilities. Strive
for predictability in your business to identify opportunities and risks.
The best budgeting process is one that
doesn’t disintegrate into a lost effort. It’s time and motion you’ll
never recapture. Setting up a streamlined and predictable budgeting
process is one of the best investments that your firm can make. And by
the way, your colleagues will thank you for it. |
