Case in Point: The Pros of a Modern Budgeting Process
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When Dale Hosack joined Western Container Corp. as CFO two years ago, he inherited a budgeting process that hadn't changed substantially in 20 years. Shortly after his arrival, an error in the antiquated system wreaked havoc with the company's financials, so he set out to bring the company's budgeting process into the 21st century. Now, he told BPM Magazine, he'll never go back.
Dale Hosack: Our general ledger runs on something called Infinium, which is very old. It's green screens. I had to learn how to do that again when I got here. But it works. Our business is not very complicated. We have 30 customers and 30 products, so we don't need high-powered software to do a lot of financial analytics. We use Infinium for everything except budgeting. For budgeting we use Microsoft Forecaster, which we implemented in May of 2004. Two years ago, they were using -- as hard as it may be to believe -- Lotus 1-2-3 spreadsheets for budgeting.
BPM: What was the budgeting process like with Lotus 1-2-3?
Hosack: If I was an outsider, I would say entertaining. As an insider, it was very, very scary. We had six plants at that point. They would send their information in, in all different formats. Whatever they sent us, we were happy to get. Each spreadsheet would have tabs for labor and raw materials and expense items. They all supposedly rolled up into a P&L.
The plants' spreadsheets all came in to a guy who was in his office 12 hours a day, six or seven days a week, trying to manipulate them into the format finance wanted to use. This system was created in '84, when the corporate budget could fit in one simple spreadsheet. At that point Western Container had one plant. Over the years, finance added to that spreadsheet. There were 52 tabs when I got here, with some formulas that were linked and other formulas that didn't link. The company added one new product for the next year, and it took the finance guy three days to add it to all the tabs.
BPM: So when you started, you targeted this process for change?
Hosack: Well, like most people, I've always used spreadsheets for budgeting because that's what we do. I knew we had to change something, but I didn't take action until we found out that a million dollars was missing from our budget. One of the adds in the corporate spreadsheet didn't work right, and we missed freight on an entire product to an entire customer for the year, which ended up being around a million dollars in freight that was missed on the budget.
BPM: It wasn't in the budget at all?
Hosack: It was in the budget schedules, but it didn't roll up into the budget totals. So it wasn't in our P&L, wasn't in our forecast. And because we do all of our pricing based on our budget, it wasn't in our pricing. That was a big mistake. You'd like to crucify somebody for that, but I couldn't because the process was just unmanageable. Especially considering the simple nature of our business, the complexity of the spreadsheet just didn't make sense. We were taking something relatively simple and making it really, really complicated. So that's when I decided that we had to change the way we budget.
BPM: Did you start shopping for a budgeting solution at that point?
Hosack: I started researching them. I read some articles, had some vendors send me information, went to a couple Web demonstrations. And I quizzed other finance people. I asked some of my colleagues, "What are you guys doing?" Most of the answers were, "We're using spreadsheets. We know they're terrible, but we don't have the time or the effort to fix it."
BPM: Were these people at large companies?
Hosack: At companies of all different sizes. Some big companies are using some of the high-end BPM packages, but a lot of big companies are still using spreadsheets. And even if they have a corporate place where they're rolling their numbers up in some nice, neat program, down at the level where people are really doing the budgeting work, the majority are doing it in spreadsheets.
BPM: What are the most significant changes to your budgeting process since you replaced the spreadsheets with a BPM system?
Hosack: The plants got ownership of their budget. Our plant general managers do their own entry of everything, and they have become budgeting gurus. They're much more effective as far as knowing what they budgeted, how they budgeted. In the past, we were never able to upload a real budget into our general ledger, so the plant general managers always just received a big lump sum for what they were supposed to spend that year.
Last February, our plant in Big Spring, Texas, was over budget in repairs and supplies. The director of operations immediately called up the GM and said, "Hey, you guys are over budget in two months. The way you're spending, you're going to be more than a million dollars over budget this year." They put in a whole new system to track and monitor their spending (something they should have already been doing but weren't), and now they're under budget. In the past they wouldn't have known right away that they went over budget, and they would have kept spending that way all year because we didn't have the detail to compare actuals with what they said they were going to do.
The whole budget process has become much better. We have standards, so everything looks exactly the same. We do a lot of comparisons of how plants are spending their money, and because we all look at the numbers the same exact way now, we can compare apples to apples between plants. In the past, we didn't know what we were really comparing.
BPM: What's an example of something that in the past might not have been an apples-to-apples comparison between plants?
Hosack: A big portion of our discretionary spending is on repairs and supplies because we have a lot of equipment -- so this is an area in which we want to compare different plants. But in the past, what one plant called a repair, another plant might call a supply. So it was hard to say, "Well, you're spending too much on supplies or too much on repairs." Now, with the line-item detail we create in Microsoft Forecaster, we can say, "This is what you're buying." It's not just that supplies are allotted $50,000 a month, but water system supplies are budgeted at $4,000 a month, while individual items for the blow machine get $2,000 a month. We can really see what people are putting behind their budget, versus just the totals.
BPM: How have the plant managers reacted to this plethora of new information?
Hosack: A couple of our GMs have gone off the deep end. They are highlighting $50 items on their line-item detail. A lot of times people say, "I spent $50,000 a month last year, so I need to spend $52,000 a month this year." Now they're saying, "I spent $4,000 on this machine and $3,000 on that machine, so why am I spending more on this machine that was bought at the same time?" They can do a lot more analysis on what they're really spending versus just putting a number out there because it's what they spent last year.
BPM: So the general managers themselves are doing a lot of analysis?
Hosack: They're doing a lot of work. Ops guys, by nature, are inquisitive and like to learn things on their own. They don't want to be trained; they're used to figuring out how a machine works. They like this because it makes them think. Before, they were just sending information. Now they think about, "OK, what am I spending that on? Why are we spending so much money on office supplies?" They go through all the detail and see their actuals and their budget comparisons. In the past, they were running blind.
BPM: Do they see one another's numbers and compare themselves with the other plants?
Hosack: Yes. During the budget review process, we put together a sheet that showed everybody's expenses on a per-thousand-unit basis so that they could say, "OK, here's where we've got to cut." People who are good want to be better and want competition. The budget helps them understand what they're competing with when it comes to cost.
BPM: What benefits has the finance department seen from getting away from all those spreadsheets?
Hosack: The best part for me is that I took a guy who was locked in his office for 12 hours a day, six days a week, for six months of the year, and made him a plant controller, where he can actually be contributing to the business. It was a position that turned over every two years because people hated the job. They'd take it because it was a good entry-level position, but they didn't want to do that for long. So that is a big plus.
BPM: What would you say to a company that is still using spreadsheets and doing things the more difficult way?
Hosack: I would say, "Surrender!" Moving from spreadsheets to BPM software probably wouldn't help an organization that already has great budgeting processes. But most places I've been would become much more efficient if they changed.
I'm a big change person -- there's always a better way to do something -- but a lot of people are ingrained in the way they know how to do it. Sometimes you have to go through some hard work to get to less work. Twenty-two years ago, when I started doing this, we didn't have PCs, so we were budgeting on 13-column spreadsheets. We know how good those budgets were. And then we all learned to be Excel wizards. Well, Excel is a dangerous tool. It does a lot of great things, but it makes the budget process very difficult.
In our business, we're always looking for the latest, greatest piece of equipment, but we were trying to run a $300 million, $400 million, business on a spreadsheet. It didn't fit. Sometimes you've just got to do something different. I'd never heard of Microsoft Forecaster until about two years ago, and I would never go through another budget process without it.
