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Summary
November 11, 2005 - Our research on planning and budgeting has found that finance
executives rate “accuracy” as an important objective of these processes. But
how should a company measure the accuracy of a budget or plan? The answer depends
on what you want to know. “Accuracy” is a slippery concept in budgeting and
planning. There are many ways to measure it, but not all of them will confer
real business benefits. Ventana Research asserts that to be useful as a management
tool, measuring the accuracy of planning and budgeting should assess mainly
how well individuals and businesses achieve key performance objectives.
Attending a user’s group conference of a well-known vendor of planning and budgeting software, we were surprised to hear another well-known software company claim it had increased budget accuracy from 85 percent to 93 percent since implementing the vendor’s application. That company had just missed its earnings guidance for the sixth straight quarter! Yet the speaker had a point. His company was forecasting spending accurately enough and had been able to hold 93 percent of outlays to that forecast on a line-by-line basis. Was this measure of accuracy important? Certainly it was to some employees but from a shareholder’s perspective it was not. Why? The company was doing a terrible job of forecasting its sales and therefore kept missing its guidance. How then should companies measure and assess the accuracy of their plans and budgets?
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