5 Lean Routines for the Annual Budgeting Process + templates

By David Parmenter

 

 

 

 

1. Adopting Peter Drucker’s abandonment with the annual planning process

Peter Drucker, the father of modern management, introduce the concept of adopting abandonment. In annual budgeting the common abandonments include:

• Removing large spreadsheets from the process and migrating to a modern forecasting tool
• Budgeting at account level
• Calculating future revenues at product and then by branch when over 50% of revenue comes from a few major products bought by a few major customers.
• Reforecasting every month when it should be done quarterly
• Giving budget holders an annual entitlement to spend when they do not know what the next year really holds, nor does anyone in Finance – instead fund them for the next quarter, a month before it starts.
• Setting monthly targets from the annual plan – this is best done just before the quarter starts from an updated forecast
• Forcing the annual plan to be the same number that the Board want to see – we have just lied!
• Allowing the annual planning process to take three months when it can be done in two weeks. Both will be wrong, so you may as well be wrong quickly!
• Tying bonuses to meeting the annual plan – leads to gaming

2.    Run a workshop to “Post-It” re-engineer the annual planning processes

For instructions on how to do this read.

3. Introducing daily scrums during the annual planning process

This is a technique that was developed to radically reduce the time it took to write new software applications.  It recognized that teams in very intense work periods do not always function properly.

Scrum (an Agile technique) – started off as a rethink of project management by Jeff Sutherland, a fighter pilot in Vietnam.  He saw that combat fighter planes and big projects had a lot in common.  They had to avoid being shot down. He noticed that large projects were:

• Characteristically late with lots of pressure and no fun
• Run even later as more resources were applied to help speed them up. Typically, the new staff were “tripping over each other” and having long dysfunctional meetings, going nowhere quickly
• Frequented with duplication of effort
• Often over planned only to find the “game had changed”
• Constantly hitting a roadblock which the team members frequently were unable to surmount as they did not have the skills or internal respect within the organisation.

Sutherland had a challenge to produce a new product in six months.  He discovered:

• A 1986 HBR study “The New Product Development Game” by Hirotaka Takeuchi and Ikujiro Nonaka that noted best teams looked like sports teams, all linked together, overcoming obstacles with intensity
• Discovered a company called Borland who thrived on – communication saturation – a daily SCRUM meeting.

The features of SCRUM are best illustrated in Exhibit 5.1.

Instead of over planning one needs to have a clear vision of what you are after.  With this shared vision you take a small chunk of work, saying, “If we deliver this feature, we will progress the project”.  We thus do not need a massive project schedule befitting an Apollo space programme.

The key is that this chunk is about two weeks of effort and is an isolated standalone part of the project that can be signed off by the customer as “Yes, that is what I want”. This chunk is called a sprint.

Each day the team’s members delivering the sprint meet in a stand-up meeting.  They are asked to talk about:

• What they did yesterday?
• What are they doing today?
• What are your roadblocks which are barriers to progress?

Their debrief is to take no more than a minute or so and some teams even have a dumb bell to be held out with the rule you can only talk as long as you can hold it up.  The team leader renamed the “scrum master”, notes all the roadblocks and immediately sets about removing them with an appropriate phone call or walkabout “Pat, please will you make time this morning to see my corporate accountant.  I understand Sam has being trying, for the last few days, to meet you.  This is now holding up the year-end and the CEO and auditors will soon be on mine and your back shortly if we cannot resolve the issue today”.

At the end of the session the group end the session touching fists, a homage to the source of this technique.

Finance teams need to use SCRUM in the key weeks in the planning process. This scrum does many things, it replaces loads of emails, as the team members get to know what has been done and going to be done and by whom. It makes everyone accountable.  There is no place for a cruiser.

Use the search string “Jeff Sutherland +YouTube scrum” to find presentations about this great technique.

4.    Using a Kanban progress board during the annual planning process

Creating a Kanban to visually manage your work is a great way to increase your overall effectiveness and efficiency. Kanban is also a great way to instil a sense of accomplishment among a team. Let’s take a look at why this is.

A Kanban board is a visual process and project management tool that helps teams organise and manage their work. Kanban boards allow teams to visualize their work and understand what is going on at a glance. Using note cards or sticky notes to represent work items allows you to show any sized body of work such as a project (involving numerous tasks) or a task (usually involving only one person). Different colours are for different staff, or work groups. Lanes can be used to represent backlog, doing, or done as shown in Exhibit 5.2.

 

Kanban boards visually show the work in progress. This way, everyone is kept in the loop.  It is particularly powerful when staff hold daily SCRUM meetings which are stand–up 15-minute meetings first thing each morning.

Kanban boards work well for any type of work. It’s so flexible that you can start with whatever process you already have.

The Kanban method uses a pull system. Instead of trying to do 10 things at once, manage your personal tasks by “pulling” in new work only when you are done with the current work.

Kanban boards show the finance team’s accomplishments. Have you ever had a hard time explaining to the Finance director or CFO what you’re working on because you have so many things on your “to-do” list that you don’t know where to begin? By showing them your Kanban, they will instantly see all of your work and understand your current workflow.

A common misconception is that doing several tasks at once can save time. This is a myth, although millions of people every day try to juggle their work so they can “feel” productive. Yet in reality it leads to stress and inefficiency. A Kanban board can help you keep tabs on your tasks-in-hand limits e.g., the maximum number of tasks that any one person can be working on at any given time.

While limiting work in progress may sound counterintuitive, it can actually increase effectiveness and efficiency. By allowing team members to focus on a limited number of tasks at once (usually no more than three), less time is wasted in task switching, or the act of switching from one task to another. Task switching consumes not only time, but mental energy in the act of constant of juggling priorities.

It should be obvious that finance teams need to use a Kanban board throughout the month.

5.    Applying Kaizen to all finance team processes

One of the guiding management principles that makes Toyota so good is “Become a learning organisation through relentless reflection (Hansei) and continuous improvement (Kaizen)”.  Adopting Kaizen means that innovation is seen as a daily activity. In Toyota every employee is expected to bring one adopted innovation a month, their average is 10 per employee per year. In one plant in Kentucky of 7,000 workers over 92,000 innovations were implemented in one year.

All the great paradigm shifters such as Peter Drucker, Jim Collins, Peters and Waterman have preached the need to innovate and not spend too much time trying to second guess whether it will work or not.

All the built to last companies came up with their big ideas through a bit of serendipity. Jim Collins refers to it as very much like Darwin’s survival of the fittest.  Try a lot of things and only let the strong ideas survive. In the Motorola example he points out that Motorola see innovation very much like a growing tree, you let it branch out, but you are also constantly pruning.

Jim Collins has created a blueprint for evolutionary progress based on analysing 3M. These five steps are:

• Give it a try and make it quick.- When in doubt, vary, change, solve the problem, seize the opportunity, experiment, try something new even if you can’t predict precisely how things will turn out. No matter what, don’t sit still.
• Accept that mistakes will be made. Since you can’t tell ahead of time, which variations will prove to be favourable, you have to accept failures as an evolutionary process.
• Take small steps. It’s easier to tolerate failed experiments when they are just that, experiments, not massive corporate failures.
• Give people the room they need. When you give people a lot of room to act you can’t predict precisely what they will do, and this can be beneficial. 3M give their staff 15% of discretionary time to play around with ideas. The “Post It” note was developed this way.
• Mechanisms/build that ticking clock. 3M ideology creates an environment where innovation was cut loose. 3M does not just throw a bunch of smart people in a pot and hope that something will happen. 3M lights a hot fire under the pot and stirs vigorously.

Toyota has a two-step process to evaluate an idea.

1. If it does not work, will it impact Toyota significantly e.g., it will take a hit below the water line? Over 90% of innovations will pass this test.
2. Each member of the team is asked “Is there any reason why we should not adopt this approach?” This puts the onus on the team member to find a good reason or it will go in.

After every month-end I recommend that you hold an offsite meeting with the finance team to discuss what went well during the month and month-end reporting process and then discuss what new innovations we can adopt this month.  Each staff member is required to bring at least one innovation to be discussed.

Annual planning templates

For 8 annual planning templates click here.

The toolkit is on sale (over 40% discount)

[i] Jeremy Hope and Robin Fraser, Beyond Budgeting: How Managers Can Break Free from the Annual Perfo