There is a shocking statistic about how many days of the year is spent building the annual budget. There's yet another disturbing statistic about how little value budgeting systems add to the budgeting process. So how difficult can budgeting be? This article will look at the concept of budgeting and some of the tools available to help companies attain an easier and more effective budgeting process.
Budgeting at most medium to large organizations starts at the top. Leaders take a strategic approach and develop goals for the next 1-5 years, depending on the industry. The goals are approved by the senior leadership team and published. The operational management, in most cases, never has access to this very important document. However, they are expected to come up with a budget every year. So what does operational management do? They take last year's budget and increase it by x%. The big question here is, where is the connection between the strategic goals and the operational ones?
So, why is budgeting so difficult? Well, to start, it's time consuming. Because it takes so long to complete the budgeting cycle, when it's over, everyone is too worried to make substantial changes as it would require manipulating an inflexible an unwieldy system. At the end of the process, revising the painstakingly-collected information is frustrating and time consuming.
It is difficult to run simple, intuitive reports; the visibility of the layers of data required to manage the business is limited. As the users were not involved in the design of the budgeting system, their buy-in is perfunctory. The budgeting system is not helping them run their business, rather it is something required by the home office or senior leadership team. There is little attempt to truly model the functions and activities of the business.
In large organizations where this complex process is managed by spreadsheets across scores of departments, the well-known phenomenon known as "spreadsheet misery" is encountered: error-ridden budgets; undocumented adjustments, difficulty consolidating the numerous spreadsheets, poor audit trail etc.
So does budgeting need to be so problematic? The answer is a resounding no.
Why budgeting should be easy
The reasons why budgeting should be easy are straightforward, though difficult to put into practice. First and foremost, budgeting should be easy because it is about how the business operates. There should be people within the organization with profound knowledge of the business processes to facilitate the easy preparation and delivery of a budgeting process. More importantly, the budget should help manage the business more effectively.
Amazingly, there are new and relatively inexpensive technologies that enable companies to capture and model their business and budgeting processes. These new technologies not only enable the easy automation of most parts of budgeting, but they allow for easy visualization of the information produced by the budget.
So what are the tools available in the market place to aid the budgeting process and why isn't every company using them?
Tools to make it easy
There are a plethora of tools designed to assist the budgeting process. The reasons why they are not de rigueur for every company include: inertia, unawareness of the available tools and comfort with spreadsheets.
However, some of the tools available to companies extend the power of spreadsheets immeasurably. They take advantage of the new internet-based technologies such as centralized databases, familiar web interfaces, easy user deployment, etc.
Importantly, these tools enable true bottom-up budgeting, that enable individual departments to create budgets that reflect the true nature of their activities, all the while adhering to the overall strategic goals of the company.
A powerful tool that the new software packages provide is out-of-the-box production reporting. This enables users to intuitively design dynamic and interactive reports that access the standard databases containing the budget information. Intelligent use of multiple, user-defined dimensions allow for vigorous analysis of the business.
Another new and upcoming phenomenon is the hosted budgeting and analysis system (Managed Services). This is a solution that allows for organizations that choose not to purchase hardware and software, but would rather pay a monthly usage fee. This option also allows for a 3rd party to manage the application, therefore reducing the stress of an already overburdened IT shop. In a managed services environment, users simply access their application through a web browser and are able to complete all their budgeting and reporting functions from any location at any time.
So what is the easy way to budget, and what does easy mean?
The easy way
While there is an easy way to budget, it requires a significant amount of work up front. For an organization to create fluent and effective budgeting, they would need to re-engineer their existing processes in order to leverage the new technologies available to them. Budgeting should be a true reflection of the business activities, with business modeling techniques that take into account internal and external factors.
Bottom-up and top-down budgeting should be employed to link strategic and operational budgets and all key stakeholders should be involved with the budgeting process to encourage buy-in.
Here is an example of a company that budgets the easy way. The company described is an international book publishing firm with offices around the world. To complete the full budget, input is required from several departments sequentially and in parallel, depending on the department. On the collation of all the information from the different departments, the VP of budgeting expects to be able to run several what-if scenarios, have a meeting with the department heads and then push back down the budgets for amendments. He expects to be able to do this daily at the very least.
This company uses a modern, web-based budgeting and planning tool hosted at the home office. Users from the various departments log into a web site and enter information specific to their activities. The business rules and logic are applied and the results immediately made available to the relevant constituents. Consequently, each department can themselves run a few different scenarios and save them, before deciding which one to send to the home office. Each scenario reflects how they might run and manage their departments differently. So for example, the production department might have a scenario that looks at the effect of outsourcing production to a country like India. How do the costs of the contract and subsequent reduced headcount affect the profitability of that department?
On receipt of the submitted budgets, the full budget is automatically made available at the home office without the need to consolidate scores of spreadsheets. The VP of Budgeting can see which departments have submitted their budgets. He then runs different what-if scenarios and prints out the results to discuss with the department heads. In his meeting with the department heads, he can log into the budgeting web site and use powerful analytical tools to analyze and share the effect of these scenarios with the senior leadership team. Using analytics like a speedometer, barometer, sophisticated bar charts; coupled with intuitive coloring (red indicates a warning, green indicates a favorable position) the senior leadership team can easily visualize the multiple scenarios as they affect the business, and in turn make informed and effective decisions.
Finally, once the ultimate scenario has been agreed upon, the sophisticated reporting tool is then used to create and distribute the right report to the right recipient at the right time. The department heads for example create their own reports as well as receive canned reports like departmental Income Statements. The leadership team on the other hand, has consolidated as well as regional Income Statements automatically delivered to their email boxes every Friday at 9am throughout the budgeting process.
So why doesn't every company budget the easy way? Because it's often quite difficult to make things look easy.
The company described above realized that to have a modern budgeting system that met its complex requirements; it needed to invest not just money, but time and effort. It created a project team that took 9 months to deliver the solution with the knowledge that once in place, the incremental effort to make changes would be minimal. The project team went through a structured process of looking at the current processes, assessing the positives and negatives, and then re-engineering the process to create a new one that served all the relevant stakeholders. They finally undertook a formal selection process to select not just the software to use, but also their implementation partner. Then they communicated the new system to everyone it might impact and gained buy-in across the organization. Only then were they in a position to actually deliver the project. Because everyone knew what they were going to be getting and how it affected their jobs, using the steps described above to create the budget was almost second nature.
This article was written by Bernie Akporiaye, Practice Manager, Performance Management. During the month of October, Bernie will be available to provide free advice to any of your budgeting questions. He can be reached at:
