The annual budgeting challenge

The annual budgeting challenge

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Afternoon all,

With the annual budgeting challenge here once again I thought this would be a reasonable time to look into this thorny issue.

As a relatively new member of the AWeb staff I can't claim to be an expert in the area, so I thought I'd throw myself on the mercy of the community and ask for your thoughts on the matter.

I have a couple of general questions, but feel free to elaborate...

  • What are the main challenges you're facing? Have they changed in any way?
  • I understand that recently budgeting has been excel-based in nature, but that in some cases this may be evolving. Are things moving on from spreadsheets? If not excel, then what tools do you use, and what results do they give you?

Your feedback, as always, would be appreciated.

Thanks,

Tom

Replies (22)

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7om
By Tom 7000
16th Sep 2015 14:29

look at last years result

and add 10% to everything

 

if you made a loss add 10% to sales and reduce cost by 10%

 

That should fix it.

 

Which software depends on what you have got some packages you can just roll over last years budget into this year and provide a factor of increase/ deduction

 

Complexity depends on size and profitability and special projects

Thanks (2)
Replying to Rebecca Cave:
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By keithas
16th Sep 2015 17:04

Tom

Tom 7000 wrote:

if you made a loss add 10% to sales and reduce cost by 10%

I agree if the figures are for the bank.

However, if for owner/directors, who tend to shoot the messenger, then reverse those percentages.

Thanks (1)
Tom Herbert
By Tom Herbert
16th Sep 2015 17:02

Thanks...

... for replying Tom. It's certainly an interesting insight into how the process is viewed.

Cheers,

TH

Thanks (0)
RLI
By lionofludesch
16th Sep 2015 17:17

Problem

Currently trying to shoehorn the costs of three international rugby matches into a budget of €50000 + players' wages.

:-(

Thanks (1)
Routemaster image
By tom123
16th Sep 2015 19:15

Never had a positive use for them.

Now, and I appreciate this is poor form as a CIMA member, I have always found budgets a waste of time.

We (in finance depts) tend to produce them for the big cheeses, based first on assumptions of the managers on the ground. This comes up with a small incremental improvement.

Not good enough for the cheeses - so sales get ramped up etc.

Final budget is often beyond anything the company has ever achieved.

Management don't buy in (understandably).

Spend the whole next year trying to calculate exactly how the budget got missed.

End up with the middle of the road result the operational managers thought would happen.

 

repeat.

Systems are always a bit crap at reporting to departments etc. Most costs are apportionments over which no-one has any control.

(Can you tell I am happy to have moved from corporation street to SME world)

Thanks (2)
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
17th Sep 2015 13:15

Any less cynical views?

Thanks for your insights, Tom. They are not far different from the FD I talked to who complained, "The trouble with budgeting is that no matter which tool you use, they give you the wrong result."

But surely there should be some benefit from the exercise - otherwise why would so many businesses go through it? The fundamental planning and modelling of expenses/income that go into a budget are as good a way as any I can think of to clarify what happens in a business - and from case studies and industry literature it does seems some organisations are getting good results with rolling forecasts and other variants that offer a more constructive approach than the annual budget ritual.

Are there any members reading this who have more positive experiences with such techniques? You don't have to be called Tom to take part.

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By ireallyshouldknowthisbut
17th Sep 2015 14:05

@John, my experiences in industry were much the same.

Complete waste of time.

The only "point" was that the higher ups (in our case group) demanded them, and every month we had to tell them why we went over or under them.  If we went over, they issued us new budgets at a higher level.

 Took up 2-3 weeks of time playing guessing games with management once a year and then wasted half a day plus each month, time not spent on the business reporting it all. 

We spent a lot of time "dressing" the accounts and pushing stuff between months to smooth it all out.  All completely pointless activity.

In terms of "why"?  There is a (naive in my opinion) assumption that this gives control, and if you leave a business to it for a year and then come back and check up there is the perception it has been sitting on its backside smoking a joint. It might be true of course, but it seems unlikely as the people "doing the business" are unconnected from the process and dont really care. All you do as an accountant is try and drip out the bad news, smoother the good news and tuck it away for a rainy day, and pray it all comes back by year end. 

What you don't do is help run the business.

I didnt ever make FD, but it I did my plan was to scrap internal budgets for our company and concentrate on making sure every spend had a business purposes, and then just report up any old crap to group. That way I would free up several heads who could then work on the business and not on the reporting.  I never was a company man!

Thanks (1)
RLI
By lionofludesch
17th Sep 2015 14:08

Sales

They can help you set sales targets.

Unfortunately, they don't help you meet them.

The problem is a lot of the costs are set in stone and you can't reduce them.

Thanks (1)
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By adf2410
17th Sep 2015 15:46

Accounting system

I have positive experiences!

 

We enter our budgets by cost centre into our accounting system.  Then reforecast every month during the year. 

 

As FD this is hugely helpful to me - especially the year just gone where we needed to make savings of almost £2m to break even (most of our income is government funded, so gets cut year on year).  I didn't think we would do it, but we have.  And we only did it because we prepared monthly management accounts showing YTD and forecasts, and tweaked costs when it was looking a bit dodgy. 

 

In an organisation our size, budgets are key, because otherwise how do you control the amount people spend?  Everyone in my organisation has online access to their own budgets, and by training them to raise purchase requisitions, we rarely get any surprises.

 

It turns out too that my management accountants were being very prudent and sticking to the under-promise/over-deliver concept - I thought we'd make a £250k deficit based on our period 11 reforecast, but it looks like we've just broken even.  I will have a happy Board!

Cheers,

adf2410

Thanks (1)
Replying to petersaxton:
By ireallyshouldknowthisbut
17th Sep 2015 16:29

.

adf2410 wrote:

because otherwise how do you control the amount people spend? 

 

That to me is the key.  You cant just bin budgets, you have to have a strong ethos of "only spend what you need to".  Not "spend to the budget"

We have all been in organisations who game the budget, ie buy loads of things just before the year and as you have 'spare' often things you dont need. Similarly not buying something that would make an immediate return (eg broken equipment that you are using temp labour to replace) 

The key to ditching budgets is to replace with a firm forward looking control that looks at ALL spend all the time. Not whether it fits within a pre-determined figure.

You can only do this if you have the right people with the power to spend and are thinking correctly about company money. 

Budgets are better than no control, but they are poor ways to control spending in many businesses.

I don't doubt that in some businesses they are the best solution, but it depends what you do and the business culture and the purposes of the budget.

 

 

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Replying to tom123:
RLI
By lionofludesch
17th Sep 2015 17:11

Planning ahead

ireallyshouldknowthisbut wrote:

That to me is the key.  You cant just bin budgets, you have to have a strong ethos of "only spend what you need to".  Not "spend to the budget"

We have all been in organisations who game the budget, ie buy loads of things just before the year and as you have 'spare' often things you dont need.

They do that because they're thinking about next year's budget.

Thanks (1)
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By adf2410
17th Sep 2015 19:03

Agree that it depends on your type of organisation...

...but mine, as it's mostly government funded, has to spend most of the money it's given, otherwise we can be accused of not spending its funding for the purposes it was intended.  So often, we will encourage budget holders to spend up to their budget by buying things ready for the following year - especially if the following year is looking quite difficult.

But, on the flip side, they understand that their budgets aren't 'use it or lose it', so if we need to reduce their budget during a year to help us hit breakeven or a small surplus, then they know that we'll maintain the following year's budget at the initial level, rather than at the reduced level.

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Routemaster image
By tom123
18th Sep 2015 20:36

Control of spending?

The problem is that budgets are generally backward looking. ie I can see what was spent last month (including all the accruals etc) against the budget.

This doesn't really help me when purchase orders arrive on the desk for approval.

ie - the reality doesn't really match up with the theory.

 

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paddle steamer
By DJKL
18th Sep 2015 21:42

My use

I no longer use accruals accounts budgets but do maintain cashflow budgets ,which I prepare  for two years at a time (each year )and input actuals against quarterly.

As a smaller entity (vis a vis accounts staff-just me) they are useful, for instance highlighting  missing revenue/ service cost recoveries, and do help to forecast any cashflow pinches; whilst we keep a reasonable float this can be partly used up if capital works are ongoing.

As a property company living on rents (core earnings) they are pretty accurate (usually- if you cannot predict cashflow from rents you can't predict anything) and where we have say committed funding to developing/changing space, with maybe 12-18 month payback, they are helpful in ensuring we do not  over commit.

They have a distinct section re property sales as I like to see both operating cashflow and total cashflow, property sales are much more difficult to budget re timing.

I did prepare budgeted accruals accounts for years for the business owners but frankly I did not learn that much from them and they did not get that excited by them anyway, so a few years ago I changed to cashflows which I found more useful on a day to day basis.

They are written in excel  and in the main function in an acceptable manner with the cashbook totals linked so that they auto update through the month (though at times writing up the books can lag if I am busy with other things) The number of tabbed pages can get a little excessive (circa 40 or so) but I have got used to knowing where everything is. I use excel to calculate service bills and auto create service invoices and whilst these are still distinct workbookss one day , maybe, I may link them in to create a bespoke whole system.

At some point (keep saying this) I may instead invest in a complete solution that allows flexible service charge apportionments as an integral part (costs by sq ft/ electric sub meters by reads etc) in effect something less cumbersome that also reports cashflow, however the drawbacks of excel are often made up by the ability to model virtually anything one wants just as one wants, an off the shelf solution might be less time consuming but I doubt it would allow the same flexibility; then again I am a luddite.

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Routemaster image
By tom123
19th Sep 2015 12:17

Cash flow forecast
The main forecasting tool we use is a 12 month rolling weekly cash flow. We do report against budget but don't do a huge amount of drilling in to possible variances.

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Man of Kent
By Kent accountant
19th Sep 2015 12:26

My name's Tom and I think budgets are great

Well sometimes.

In my experience budgets are poorly prepared and poorly used - most of the time.

I did work with one MD (I was FD) who got the management team to treat the budget like a bible. Every senior manager had to give input and take ownership.

Directors and managers had to take their copy of the budget to all meetings - it was nearly always referred to in sales, planning, financial, management and board meetings.

This is the only positive experience I've had and it worked very well.

On the whole however it fits Tom's description - not achievable and no one takes ownership. The document being used as a doorstop and never referred to until the budget process begins again next year.

 

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RLI
By lionofludesch
19th Sep 2015 12:58

Directors

The attitude is generally "we need to spend this so we'll need to sell more widgets to cover it".

Whether that's achievable is another thing completely.

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By gwilkinson
19th Sep 2015 13:58

Key Drivers

I think you should always consider the key drivers of value and profit in the business when you are working out your budgets.

A restaurant for example could set a staff spend as a percentage of turnover.  A manager on the ground is motivated to manage his spend on a slow night by sending under-utilised staff home early.

Working with drivers also speeds up the re-forecasting of budgets.

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Replying to Mgdaly:
Routemaster image
By tom123
20th Sep 2015 07:13

Zero hours

gwilkinson wrote:

I think you should always consider the key drivers of value and profit in the business when you are working out your budgets.

A restaurant for example could set a staff spend as a percentage of turnover.  A manager on the ground is motivated to manage his spend on a slow night by sending under-utilised staff home early.

Working with drivers also speeds up the re-forecasting of budgets.

So glad I don't work in a 'zero hours' based sector, personally.

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Replying to Rgab1947:
RLI
By lionofludesch
20th Sep 2015 09:07

Outlaws

tom123 wrote:

So glad I don't work in a 'zero hours' based sector, personally.

These contracts need to be outlawed.

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By gwilkinson
21st Sep 2015 08:33

They have their place

Zero hours contracts have their place in a mixed and flexible workforce.

Flexibility in staffing is key for businesses with seasonality.

 

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By Dick Lloyd
25th Sep 2015 20:01

Very interesting debate

The problem with the traditional budgeting approach is that one set of numbers is used for three distinctly different (and sometimes - actually invariably -  conflicting) purposes.

 - Setting targets (what I would like to achieve)

 - Forecasting (what I expect will actually happen) and

 - Allocating resources (what will I need to make it happen).

I have seen it suggested that the traditional budgeting process should be broken down into three separate processes, each process addressing one of the above, with three different sets of numbers.

There is some evidence to show that when it is broken down into three separate processes, the results achieved are much better.

 

 

 

 

  

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