Many companies struggle with budgeting, confident that the budget ‘looks good’ but often unclear as to why it is not delivered. Small businesses generally know the reasons for budget deviations but may not be able to quantify the effect of each factor. Anyone with experience of venture capital funding soon learns that any lack of clarity around financial planning, cash flow projections or variance analysis, guarantees a swift souring of relations. As businesses grow, a methodical approach is required to financial management.
Invariably, multi-nationals apply robust budgeting and financial management procedures. Central to their approach is the development of a detailed financial model, constantly updated and monitored for deviations from budget. All budget proposals are challenged, rationale is documented and regular reporting identifies the value of each variance attributable to quantity, price, currency movement, location and cost centre. Businesses which challenge unrealistic budgets, identify problems as they occur and take prompt corrective action, are businesses which outgrow and outlive their competitors.
In Ireland, when anyone mentions the need for improved financial management, you can bet your life savings on someone saying ‘we need someone with industry experience’. Why? If a business in the widget industry decides to purchase an office building, no one says ‘we need a solicitor with widget experience.’ Everyone accepts the need is for a solicitor with conveyancing experience – i.e. relevant work experience rather than industry experience. Why should the accounting profession differ? As one executive put it, if he was to recruit based on industry experience, the best he could hope for would be to replace his own poor systems with the poor systems of another industry player. What is so special about the industries in which we operate that could make them impossible for others to understand? In Denmark, employers are more interested in work experience than industry experience.
Robust financial management requires the application of a process, central to which is the development of a detailed financial model, linking strategy, budgets, cash flow forecasts, results and variance analysis. The financial model is developed via discussions with individuals responsible for each aspect of the business. It is essential that the model reflects what the business is doing – not what the ‘industry’ is doing, not what another industry player is doing and not what the model developer thinks the business should be doing. No doubt there are industries so specialised that industry specifics cannot be quickly learned – but I have yet to find one. The industries in which I have worked include telecoms, EPOS, beverages, beef processing, corporate treasury and financial services; in each, multi-national standard financial management systems were introduced by applying a process, one in which industry specifics were identified as part of the process. As Bill Clinton might put it: ‘It’s a process, stupid.’
While central banks fret about an inverted yield curve, Brexit and the possibility of the Great Recession moving to a phase 2, now is an appropriate time for management to ask whether budgeting and financial management systems are fit for purpose.