By Nitin Madan
Private businesses are seen as more efficient than state-owned enterprises, and for good reason. Privatisation has helped revitalise the Indian economy since 1991 when the government embarked on its liberalisation drive. There have been myriad success stories of privatisation in India while the struggles of state-owned businesses are well documented. The government’s disinvestment strategy has generated a great deal of interest as it is crucial to managing fiscal deficit. Disinvestment is key as it helps improve state finances and support long-term growth prospects.
Even as privatisation gathers pace in the world’s fastest growing major economy, many large private companies still have much to learn from the government in one key area: planning, budgeting and forecasting (PBF). Keeping in mind that it is not a like-for-like comparison, we would like to draw your attention to the broad PBF issues, wherein some Indian corporates, especially promoter or family-run businesses, can be seen to lag state-owned enterprises.
- Organisational focus: some corporates in India do not have a separate function for planning, budgeting and forecasting, often called enterprise performance management (EPM). The Indian government started focussing on long-term plans from 1951 when the erstwhile Planning Commission was established to make the planning process the bedrock of the Indian economy.
- Planning horizon: long-term plans for many corporates serve as a mere tick in the box with growth multipliers applied on all budget heads. Furthermore, rapid changes in the business landscape have made long-term plans somewhat unviable. By contrast, the government has been using a long-term plan approach to drive focus on specific themes. The government replaced the Planning Commission in 2015 with the NITI Aayog to further its planning agenda and horizon. Corporates, however, have restricted their long-term plans to media/investor statements of top-line/capacity/investment infusion over the next three to five years.
- Level of detail: in most corporate budgets, the level of detail is largely restricted to revenue and profitability. The budgetary approach is mostly top-down, and a lack of detailing under each head does not support flexibility in managing expenses. The government has a more hybrid approach to budgeting, where each head – whether it be revenue or expenses – is projected using a bottom-up rationale.
- Centralisation vs. decentralisation: The Union budget is prepared after receiving inputs from all the ministries and departments on their revenue and expense expectations. Extensive consultations are held between the ministries and the finance ministry’s department of expenditure. At the same time, stakeholders, such as farmers, businessmen, FIIs, economists and civil society groups, are also consulted. Once the Cabinet defines and approves the budget, every ministry and department must manage their operations within their respective budgets. They are only allowed to approach the Central government for additional budget requirements if they have a compelling rationale. Unlike the government, many corporates do not delegate even after budgets are approved and keep a close tab on each expense head. This leads to red tape, inefficiency and a lack of ownership in other functions. Additionally, this keeps promotor/senior management mired in transactional activities when they should focus on strategic endeavours.
- Budgetary controls: senior management in some private companies tend to keep a tight control on budgets and changes, if any, are based on an individual’s thought process rather than an appropriate governance process. The Union budget, however, follows a strict governance process to manage any change in the overall budget or budget movement across different heads.
In conclusion, a formal PBF process offers significant benefits to both private and public organisations including the following.
- Freeing up bandwidth for top management to focus on strategic initiatives to drive growth
- Empowering functional heads to help drive productivity and support strategic initiatives
- Better accountability and quality of responses to business challenges
- Proactive, efficient and effective controls supported by technology
- Effective performance management through defined KPIs.
PBF is an established function across almost all leading multinational corporations. Best practices, functional designs, technologies, talent and processes are already well defined. Most Indian corporates can seamlessly and rapidly adopt these. As the budget season draws to a close, there can hardly be a better time to contemplate the importance of a robust planning, budgeting and forecasting process.
(Nitin Madan is Partner, CFO Advisory at KPMG in India. The views expressed are the author’s own)