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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.

  • Do you have trouble keeping track of multiple iterations of the budget?

  • Are you devoting too many resources to number crunching and not enough to strategic analysis?
  • Are your budget deadlines too tight?
  • Is it impossible to coordinate budgets across the organization?

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.

  • 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%.
  • 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.

  • Reduce the time to develop the budget.
  • Reduce the number of iterations and level of detail.
  • Use budgeting productivity tools to improve efficiency.
  • Consider external, non-financial, longer-term influences.
  • Make your process dynamic so it can adapt to changing business conditions.
  • Strive for shorter planning cycles with more time for strategy and analysis.
  • 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.


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Updated 08/25/06
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