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Budgeting - why bother?

22nd Sep 2015
Editor AccountingWEB
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“Complete waste of time”

“Never had a positive use for them”

“A completely pointless activity”

“The reality doesn't really match up with the theory.”

No, this is not a panel of South African rugby fans dissecting their side’s performance at the weekend, but a sample of Any Answers comments when the subject of budgeting was raised. There were brave individuals who stuck up for the annual budget process, but for many it appears to remain a time-consuming, frequently frustrating activity.

As finance managers with 31 December year ends gear up for the ritual skirmishes surrounding the annual budget, now is a good time to ask: why does budgeting remain such a fixture in the management tool box? And are there ways in which companies have enhanced the process and obtained improved results from it?

Why budget?

In a recent white paper on the traditional budget process director of the Budgeting Beyond Institute, Anders Olesen, states: “The budget produces targets for the coming year, a financial forecast, and an allocation of resources. The process ensures co-ordination throughout the entire company and provides management with a ‘stick in the ground’ and a sense of control.”

Steven Priscott, financial director of Sift and a CIMA member, believes the budget still plays a useful role in financial planning: “A budget is still a reference – ‘at this point in time we thought this’ – and that is useful. It defines why the company exists. It gives an objective statement for the company of what they hope to achieve.”

AccountingWEB member adf2410 also saw the bright side of budgeting: “In an organisation our size, budgets are key, because otherwise how do you control the amount people spend?”

Budget limitations

Although a budget may provide a useful point of reference, Anders Olesen from Budgeting Beyond argues that the traditional approach has acute limitations: “Very few leaders disagree that the budget process has problems, yet most companies continue to prepare annual budgets. We can only find two explanations: either managers do not know what to do instead, or consider the problems too small to justify a change.

“The key point to make is that the traditional budget process is flawed. It is trying to combine too many conflicting things: targets, forecasts and resource allocation. A target should provide direction and inspiration for the organisation to reach a desired outcome, whereas a forecast should be unbiased, showing the expected outcome and providing decision makers with information about where the company is heading. When you combine these two conflicting purposes in one process, it is impossible for this process to serve its purpose.

“This leads to the conclusion that the budget process should be separated into its different sub-processes – targets, forecasts and resource allocation.”

Technology

But splitting the process may only be part of the solution. Nicky Wilkins, head of customer engagement at accounting software and service company Symmetry, argues that technology has changed the role of the finance manager and what they can do with the budget: “It shouldn’t be that the majority of their job is creating the spreadsheet, creating the budget report, processing the purchase orders or the invoices. It still is in so many organisations, and there is no reason why all of that can’t be automated.

“This then enables the finance manager to ask the real questions: ‘Why are we spending so much here?’ And, ‘Could we free up that budget pot to do something else with it?’, which is really what the business owner pays them for. You can then actually start using your budget instead of just managing it.”

Sift’s Steven Priscott adds: “We have a forecasting system called Adaptive Planning that does the heavy lifting on consolidating and gets rid of routine boring tasks like making the spreadsheet work. It's a good framework that adds up costs - a flexible but firmly regulated version of Excel on steroids. Getting rid of the menial tasks allows you to become a reviewer, not a doer.”

Mind-set

So is making the most of your budget just about the tools you use? Anders Olesen thinks that company culture also plays a prominent role: “The biggest problem is human. A lot of things that are rational behaviour for employees lead to sub-optimal performance for the company. People are rational. They stick to their target-based system, and in some cases employees are hiding information from their bosses or peers to have less ambitious targets, get bonuses, make themselves look better. All of this is a problem in the old school budget world, but very few managers see this as a systematic problem.

“We find that by giving people more freedom and transparency and becoming more agile companies can establish themselves with a strong competitive advantage, as they are agile enough to take opportunities and face unexpected risks.”

Collaboration

Sift’s Steven Priscott believes that collaboration is important in forecasting and budgeting: “It varies from business to business but it’s more powerful the more people are involved. Budgeting is about understanding your organisation, and by involving more people you develop a better understanding. We used Google Docs so that multiple people can collaborate on the same document.”

AccountingWEB member adf2410 agrees, stating: “Everyone in my organisation has online access to their own budgets, and by training them to raise purchase requisitions, we rarely get any surprises.”

The future?

As Priscott points out, each and every organisation is unique and a budgeting process that works well in one company may have disastrous consequences if applied to another.

There is no ‘magic bullet’ solution when it comes to budgeting. But as company structures, technology and mind-sets continue to evolve, there seem to be common areas where companies can improve the process, and perhaps ease the pain of the annual budget cycle.

How has budgeting evolved in your organisation. Are you still stuck in the ritualistic, game-playing rut, or have you found ways to make the process more effective and relevant?

Replies (3)

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By [email protected]
24th Sep 2015 11:22

Budgetting

Extracting the pluses and minuses from the above commentary I would add:

We are often brought in to create a forecast (includes operating, cash flow and linked balance sheets) to a company that is cash stressed. Although the financier wants to know where the business is going in terms of cash flows this has to be built on income and resourcing drivers over time.

I explain that rather being a "one off" exercise each time we produce management accounts (usually monthly) these are overlaid on to the existing forecast so that the effects of changes in the month can be seen within the forecast over the longer term. At this point the forecast may be amended (especially if cash targets are under threat) and in this way the forecasting tool remains live reflecting the current impact of changes to the main operating drivers.

Our cloud based solution means that SMEs can take advantage of a cost effective online accounting service which feeds the updating of the forecast over time.

 

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By paul seddon
24th Sep 2015 11:46

I would commend the approach set out by Anders Olesen and the Beyond Budgeting Institute.

In my cost management consulting practice I frequently find that potential savings from procurement processes do not find their way into actual savings.

One key reason is that the potential savings do not lead to downward adjustment of relevant portions of a cost budget. The result is that by default the budget holder gets the right to acquire more volume of resource.

Separating the resource allocation and usage reporting process from other aspects of budgeting and reporting is essential if savings from procurement exercises are to be complemented by correct spending behaviours and borne out in capturing savings.

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By Jane Cowan 1981
28th Sep 2015 12:44

If you don't have a Budget and Projection ...

.... they it may come as a complete surprise when you become insolvent. // A Budget HAS to be set with remaining solvent in mind, so that you can compare actuals with budget, and take remedial action before it is too late.  // So it should be thought of as a LEGAL requirement for Limited Company and Partnership Directors, if they are to avoid severe problems in certain circumstances of Company failure .. insolvency .. 

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