A bold statement I know! Realising that I could be missing something, Andrew Dunn an associate with extensive experience in managing the finance side of budgets for major hotel groups kindly agreed to run a sense check and give his own thoughts on the subject.
We would love to know what you think
Over the last few months I have talked to various senior people in the hospitality industry who were busy doing budgets and business plans. Needless to say, they were not enthralled with the time and energy the process involved and the fact that it seemed to consume and almost paralyse the whole organisation with many investment decisions (operational and capital) delayed until the budget is done.
I have to say this is consistent with my memories. No one that I can remember looks forward to budget time, they just look forward to it being finished and being able to get back to running the business – and therein lays the problem!
Some facts about business today:
- It is hard enough to predict and forecast a month ahead never mind 12 months
- All larger business are re-forecasting to the end of the year on a monthly basis (recognition of the above)
- The world is dynamic and unpredictable quickly rendering many strategies set out in business plans irrelevant
- Today’s successful companies are agile and lead rather than follow their market. Their limited resources focus on work that is meaningful and fulfils the long term vision of the company
Despite all of this we persist in dedicating massive amounts of time and energy into creating budgets and plans to solve last year’s problems which are largely outdated as soon as they are printed (remember many are done 2-3 months in advance of the financial year starting!)
- A lot of business plans in drawers gathering dust (often returned to where they came from having been dusted off for this year’s process!)
- Patch work strategies and tactical plans to address unforseen problems that arise
- Time and effort spent analysing/justifying numbers that do not meet budget
- A lot of time spent on the urgent but not necessarily the important for the business
- Another review and changes to the budget and business plan format and process to make it “better” next time
What’s the answer? I don’t know, but I do reckon it would be worth a discussion to come up with a solution that was faster, more accurate and meaningful whilst keeping the banks, owners and financiers happy. Not to mention engaging the people involved in the process.
- Engage people in the process and get true commitment and accountability
- Get the business working consistently on the important rather than urgent
- Shape the future rather than react to past events and situations
- Deliver better results over short, medium and long term
Oh and not least – save time, money and reduce the opportunity cost of having the business tied up in budgeting and planning.
1. Turn the existing month forecast to the end of the financial year into a rolling 12 or 18 month forecast. Let’s makes sure it is done well and at any point in time it becomes the budget
2. Don’t bother setting plans for a year, know what has to be achieved for the business in that year (owner’s longer term asset plan, the management company strategy) then set 90 day plans – review, adjust and reset after 90 days. (see Success Alliances for Hotels)
3. Every 90 days review the world you are operating in. Where a goal or activity is no longer relevant then stop it. Accept that the world has changed and what needs to be done and do it – don’t wait for the business plan to come around again.
Some will argue that the budget is an important process to go through the business in detail. I would argue that an in depth review once a year is not sufficient anymore. Modern reporting allows managers to know their business better than ever before, they need to be supported and encouraged to know and be across at any given time what is important to the business and review in depth as the year unfolds.
Would we really save time with all this?
The forecasts are being done monthly, so in theory no extra time is needed.
A 90 day review when done effectively can be done in a half day. (Remember we are looking forward and on things that matter)
Maybe, or maybe it should be easy to free up the time for people to do better work on the stuff that is relevant and current.
I could not agree more that the traditional annual business planning cycle utilised by the majority of the industry should be reviewed. There must be a better way. Is it called an annual business plan because it feels like it takes all year to complete?
Is there life beyond budgets?
A rolling forecast process is certainly one way forward in reducing the resources directed towards the annual budgeting process. In order for this to be a success there are a number of aspects to consider:
- Is the current forecast process robust? Are the right tools and processes in place. Does it produce good forecasts? This might be the first thing to review when considering implementing a rolling forecast process. Once everyone is comfortable (managers, corporate office, owners, shareholders) that the forecast process is delivering then perhaps its time to look at changing the budget process.
- Improved collaboration with owners might be needed – owners and managers need to be speaking the same language. More often than not the owner is presented a business plan and then the negotiation starts. In order for the rolling forecast process to be a success there needs to be better and more consistent dialogue with hotel owners on what the future looks like rather than a monthly meeting just focusing on past performance (which is still important!).
- What is the end game? Is it just to reduce the time spent on annual budgets or is it also to develop a better and more strategic way of managing the business?
Owners will always expect an annual budget but there are better ways to deliver. The annual budget process can definitely be reduced if not entirely replaced.
Any change that can potentially make a business more agile, more responsive and more strategic is worth further thought. Perhaps the business planning process is the best place to start.
If you read this and are inspired to look at a new way for your business then drop us a note. We would love to share our thinking in more detail and see if we can assist your discussion with the rest of the business and facilitate a more strategic approach to business planning and budgeting.