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NOTE: Effective January 1, 2017, I will no longer post new articles since I am now fully retired.

Wednesday, August 24, 2016

Improving the Budgeting Process

One of the most non-value-added activities within financial management is budgeting. Budgets are prepared to allocate and control how resources will be used in the future. Unfortunately, the future is hard to predict and upper-level management doesn't always communicate with people who prepare budgets. Because of poor communication, budgeting becomes an exercise in futility. Some of the problems associated with budgeting include:

- Poor communication from decision-makers.
- Too many people involved in the process.
- Budgets don't help manage our business.
- Budgets are outdated by external events.
- Budgets are difficult to revise.

Since upper-level management often circumvents the budgeting process, the first thing to do in budgeting is to find out what does management expect from the budgeting process? Next, make sure management decision making is linked to the budgets. You can accomplish this by creating budgets within the strategic planning process. Don't forget to include external factors when preparing budgets. Outside events and issues that are likely to occur in the future and these have budget implications. Example: Our five year lease on our office comes up for renewal next year.

Budgets should be easy to revise. When new planning data pops up, your budgeting process should accept the new data and cascade out revised budget reports. If budgeting is to have any meaning, then you should hold your cost centers responsible for meeting their budgets. If there is resistance, then capture feedback from end-users to improve the budgeting process. If you find yourself always revising a budget, consider preparing several budgets or setup a contingency budget if you expect changes. It sometimes helps to start at the top - prepare the basic outline or summary of a budget and get approval before you spend lots of time preparing detail budgets. Or better yet, try to reduce the detail in your budgets to streamline the entire process.

Budgeting should be a dynamic process within strategic planning. The more your budgets can react to change, the closer budgeting will be to a value-added activity. You may want to consider automating the process. This will require budgeting software.

Budgets are often prepared with the use of spreadsheets. As organizations grow and becomes more complex, the use of spreadsheets must give way to formal budgeting applications. A database of spreadsheets with increased functionality can sometimes help improve the budgeting process where everything is handled through Excel.

Finally, when it comes to formal budgeting software, take a hard look at these features:

Database Functionality: Each budget dimension (cost center, general ledger account, business segment, etc.) should stand separately so that data can be mapped against each dimension. This allows the user to view budgets by whatever x and y dimension he or she chooses.

Bi-Directional Calculations: It should be easy to make random changes to budgets within any level of the organization. Changes should be made from the top and the bottom at the same time. For example, a 5% cut to all departments is made and at the same time, the Marketing Department Budget increases its line item for research.

Multi User Sharing: The budget system should not be restricted to any single user. By allowing users to share access to the same database, duplicative procedures are eliminated. Obviously, the budgeting system should include line item security controls for each dimension within the system.

Easy to Learn & Use: The budgeting system should be simple and data entry should be self-explanatory. A spreadsheet like feel can help reduce learning time since most professionals are very familiar with spreadsheet programs.

Customizable: The actual calculation logic should be subject to modification by the user since one size does not fit all. Users need the ability to customize how budgets are prepared to meet the needs within the organization.

Audit Trails: It should be easy to tell who made a revision to the budget. The amount and variance associated with the revision should be easy to identify within the budgeting system.

External Importing of Data: The budgeting system should be able to import data from external systems. This can streamline the process and make budgeting more of a value-added activity.

What If Analysis:  Good budgeting programs should include features like "what if" analysis and customization options at each budget control point.

Enterprise Wide Data Consolidation: The real power of automating the budgeting process can be found in consolidating large volumes of data and integrating all budget control points into a single, unified budgeting system.

This article has touched on something very fundamental to business - budgeting. If your current process is not adding value for decision makers, then you need to improve the budgeting process.

1 comment:

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