What do budgets and hurricanes have in common?
Hurricanes are among the most violent storms on our planet producing strong winds, heavy rains and floodings.
Budgeting is a type of short-term planning the goal of which is to transform strategic objectives into operational plan by allocating available resources.
Though one is a natural phenomenon and the other is a business process, budgets and hurricanes have more in common than it may be noticed at first sight.
The most obvious shared feature is their seasonality. For example, the Atlantic hurricane season runs from the beginning of June to the end of November. Budget cycle usually starts 4 to 6 months before the beginning of the new fiscal year and for many companies it usually falls on June / August – December period. Coincidence? Perhaps. So, when budget season alert is issued by the finance function, all other teams will probably prefer to be immediately evacuated.
Next similarity relates to the environmental conditions that must be in place for a hurricane to form and intensify. Though this may not be evident right away, very similar ingredients can turn a company’s budget process into a disaster.
Warm sea surface temperatures vs Rising temperatures around budget targets
Heat and tension around next year targets as well as constantly burning deadlines contribute to the rising temperatures in the company. The more ambitious the targets are and the closer the budget approval is, the higher the tension will probably be.
Unstable atmosphere vs Uncertain business environment
Budget discussions are focused on the future which is difficult to predict. Small changes in the external environment may cause major repercussions and impact company’s performance. Most of the budget hypotheses will be validated later while business teams are supposed to commit to the budget targets right now.
Low pressure at the center of the storm vs Weak finance function
Low level of collaboration between participants of the budget exercise and weak finance function as the owner of the budget process add to forming “dark clouds” over the heads of the finance team members.
Wind vs Inefficient communication flows
Chaotic communication flows, delivering small pieces of “only required” information not allowing to see the whole picture, contradictory information coming from different sources, these are only few examples of inefficient communication that creates a swirl which becomes bigger and bigger with every budget iteration.
When all these factors are joined together, any small thunderstorm can transform into a powerful hurricane which is no longer under control of the finance function and can sweep anything in its path.
Like hurricanes budget processes can be devastating.
A damage caused by failed budget exercise may be long-lasting and affect particular teams or the whole organization. It may include financial loss, issues with cash, lack of motivation within business teams, pointing fingers to put the blame on someone for errors and underperformance, damaged reputation of the finance function with further lack of trust and no power in decision making, no coordinated actions and joint efforts and, as result, no alignment towards strategic objectives.
Hurricanes and especially their intensity are usually difficult to predict and are impossible to control. Basic recommendation for survival is to run from the water and hide from the wind.
However, even if self-preservation instinct dictates you to flee from dangerous situations, this is not the best option for finance professionals involved in the budgeting.
Unlike tropical storms, budget cycle can and should be managed properly to avoid terrible consequences. While uncertainty associated with the external factors will always be present regardless of our actions, collaboration, communication and maturity of the finance function are the factors we have control over.
Here the analogy with tropical storms is popping up again, this time regarding possible scenarios on how hurricanes lose their intensity. Tropical storms usually weaken when they hit the land, move over cooler water or interact with other weather systems. These conditions basically leave a hurricane without the energy of its driving forces.
Similarly, in the budget cycle, improved collaboration, communication and maturity of the finance function cut destructive processes off of its fuel.
Transparency and efficient communication are essential to decrease temperatures and tension. Here are some recommendations for FP&A teams:
Lead the budget process and adjust it to the needs of the company to overcome flaws that cause stakeholders’ dissatisfaction
Discuss expectations and set clear goals with top management
Be the first point of contact for business teams to improve trust and collaboration
Schedule and facilitate meetings with business departments, shift focus from what should be achieved to how it can be achieved to boost constructive discussions
Develop communication plan to share information regularly
Document all assumptions to validate them later on
Organize lessons learned session to avoid the same mistakes and improve next budget cycle.
Many FP&A professionals faced difficulties and suffered from failed budget exercises. What about you, have you witnessed and survived a budget hurricane?