Budgeting - why bother?
“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?
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?”
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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.”
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.”
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.”
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.”
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?
Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have a story that might interest us or wish to comment on the site's coverage get in touch via the site's private message function or Twitter DM (@AWebTom)