Burn the budgets, they say - budgeting is dead, long live... But long live what, without budgets, asks Kevin Phillips, MD of finance budgeting and product development specialist idu Software. It`s impossible to run a business without having an estimate of what lies ahead over the short- and long-term - budgets are crucial for business planning purposes, purchasing and managing revenues and expenses.
"Budgeting itself is not the dodo - it`s the budgeting process that needs to be re-looked," says Phillips. "Without an efficient budgeting system in place that truly reflects every facet of the company, there`s little chance of effective financial planning in action."
Phillips emphasises two aspects that are guaranteed to dramatically improve the budgeting process: a budgeting environment that requires input from more than just head office, and reliable, user-friendly budgeting software. Input from cost centre managers is a vital link to drawing up a budget that realistically reflects figures from each division.
"Budgeting should be an integral part of the cost centre manager`s job description. If top managers do not involve cost centre managers in the budgeting process, they cannot hold them accountable for the cost centre`s figures. Cost centre managers who give their input to the budget are more likely to buy in to the final budget, subscribe to it and make it work," says Phillips.
This school of thought, believes Phillips, is diametrically opposed to the traditional thinking of a decade ago when, typically, head office set the figures and each division was handed its respective budget against which all business activity was measured. The process was centrally managed and inflexible.
"Budgeting has come a long way in 10 years. Business has recognised there is considerable value to be gained by involving cost centre managers in the budgeting process. Throwing out the consultative budget process would create problems with the ownership of the budget and with convincing the team to subscribe to and abide by the budget," says Phillips.
It`s not a question of the budgeting process being inefficient or ineffective; it`s more one that involves the toolsets that managers are using to prepare the budgets, says Phillips.
Over the past 10 years, as business has grown comfortable with the concept of involving end-users in the budgeting process, managers have used the tools with which they have felt most comfortable: most commonly, Microsoft Excel spreadsheets.
"Every task is simplified with the use of the correct tool. For an accountant, Excel is an incredibly powerful tool and in most situations the right tool for small and even medium businesses. However, a large organisation applying its budgeting process smoothly across a multitude of divisions and departments, each with its own diverse requirements, is best facilitated by a toolset designed specifically to address the large corporate budgeting process," says Phillips.
For example, if a business has 20 cost centres, it`s not difficult to consolidate 20 spreadsheets. But considering there are likely to be separate spreadsheets for capital expenditure, travel, basic expenses, new business figures and various other sections, there will be more than seven different spreadsheets being sent to the 20 managers. This means there will be upwards of 140 spreadsheets for each manager to consolidate. Imagine a large company with 100 cost centres and 700 spreadsheets to consolidate - the version control and manageability of such a project is vast and can often take up to four months.
"Good budgeting software makes the process more streamlined. Online data capture and transparency of data is critical to line managers involved in the budgeting process, making the process far more efficient. Working on budgets for four months of the year is not what cost centre managers are paid to do and certainly not what their annual bonuses are driven by. A reliable, user-friendly budgeting tool makes the process quick and easy, and will not prey on productivity," says Phillips.
Budgets need to be sustainable. The first step towards sustainability is involving the cost centres and obtaining managers` buy-in.
"Goal congruence is key: with everyone pulling in the same direction, each division and department moves forward together. The budget is the starting point for the following year`s goal congruence, and focuses the entire company to look forward in the same direction, together," concludes Phillips.
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