Almost 1 in 2 finance professionals say annual budgets are 'politically agreed numbers', which cease to be relevant after they’re set.
The average business' planning, budgeting and forecasting processes are failing to meet the strategic and operational needs which they are designed to support, according to the findings of new research by KPMG and the ACCA.
The Planning, Budgeting and Forecasting report surveyed 900 finance professionals globally about the effectiveness of their planning, budgeting and forecasting procedures.* The study found that current processes are seen as antiquated and are not aligned to support strategic or operational processes of the business.
The research also found that respondents were very cynical about the relevance and reliability of the budgeting process. Almost one in two (46%) said it was a politically agreed number, generated from the top of the business, and not linked to operational reality. 62% said budgets simply reflected a point in time and quickly ceased to be relevant as the financial year went on.
John O’Mahony, Head of KPMG’s Enterprise Performance Management team, said: "Using antiquated processes and systems which aren't helping the business to make informed decisions risks damaging the credibility of the organisation. The board don’t want a static set of historic figures, but future looking metrics which can help them to track progress against their strategic objectives and realign resource and effort accordingly. “However, while there is tacit acknowledgement that the historic budget process is broken, we are not seeing the use of better processes supported by new, real time, systems. Over one third of respondents said that they were still not using rolling forecasts, which better reflect changing market conditions and thus stay relevant for longer."
Two thirds of respondents said urgent change was needed to make financial planning a joint effort between operations and finance. 65% said their finance team spent the most time on planning and forecasting, with only 7% of operations teams playing a similar role.
Jamie Lyon, Head of Corporate Sector at ACCA, said: “The starting point for great planning, budgeting and forecasting processes is having the right enterprise culture. Tone at the top and visible support is critical in integrating and effectively delivering these activities into the business. It has to be a real partnership approach between finance and the wider organisation in ensuring that strategic alignment.”KPMG and ACCA's study also revealed that organisations are struggling to use data analytics effectively. 31% of the finance professionals surveyed said that the quality of the data was the biggest impediment to using data analytics in their planning processes.
17% also said that management ignored the data available and simply pursued the same decision.
"The two issues are intrinsically linked. Inaccurate data has eroded C suite trust, encouraging them to base their operational decisions on instinct rather than insight,” said John O’Mahony at KPMG.
"As a result of this culture of distrust we are seeing systemic underinvestment in finance technology. 41% of those surveyed said that they haven't invested in a planning tool other than Excel and of those who had, 28% said it hadn't delivered the benefits expected, setting them back yet further.
"It is crucial to invest in the right tools and appropriate methods for your business. This will enable the finance function to move away from static reporting, to identifying new trends, which is of far greater value to the board. This greater insight will help pinpoint prospects and risks, so businesses can better place their bets and make more informed decisions."
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*The data used in the report is from a survey which was conducted between 17th April 2015 and 11th May 2015, and represents the view of over 900 finance professionals from more than 50 countries. Whilst employees from organisations of all sizes participated in the survey, over 60 percent were from organisations with over 1,000 employees with annual turnover of at least $100m.
Zoe Sheppard, Senior PR Manager at KPMG
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KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff. The UK firm recorded a turnover of £1.9 billion in the year ended September 2014. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 162,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.