According to a new guide from Zahara, there’s a big difference between ‘budgeting’ and ‘budget management’. While budgeting is often second nature, budget management, the process of sharing, monitoring and controlling the budgets that have been set, is altogether trickier.
Last year, the CEO of UK retailer Timpson shot off an interesting tweet. “Just sorted next years budget (we call it a ‘forecast’ as we banned budgets/fantasy figures years ago). Took longer than normal, 8 minutes. Promise to be quicker next year!”
When asked how he had reeled off his forecast in such record time, James Timpson answered succinctly, “By knowing my business and keeping it simple”.
Of course, budgeting and forecasting isn’t a race and Timpson’s rapidity is at the extreme end of the scale, but his off-hand tweet points at a deeper truth in business.
Often, it’s not budgeting that’s actually the hard part, it’s budget management. For finance professionals, budgeting is often second nature. But budget management, the process of sharing, monitoring and controlling the budgets that have been set, is altogether trickier.
That’s likely why many businesses don’t really bother. It’s a slog to disseminate budgets to departmental heads and budget owners and maintain budgetary control over a full financial year relies too heavily on manual processes and sharing of spreadsheets.
As a result, managing budgets tends to be a one-off task designed to satisfy bank managers and shareholders but the budget is only dusted off 12 months later, differences explained away and excuses made.
Actual budget management falls to the wayside and the figures are kept locked away in a spreadsheet that’s pretty much impenetrable to the rest of the business.
That’s not to say Excel isn’t effective: its popularity is down to its adaptability. But this adaptability is perhaps more of a trade-off than many finance leaders imagine. While you're free to tinker in Excel, it does little to actually address the inaccuracy in your forecasts that requires you to tinker in the first place.
As Kevin Philips, CEO of IDU and AccountingWEB contributor, previously explained, Excel is great unless you try to use it as a distributed toolset. And that’s a major hurdle if you want to carry out effective budget management. As Philips put it, “A budget only works if the people spending the money buy into the budget.”
Budgets are difficult to manage manually, especially across multiple business units and departments. That’s why there are often significant variances between budget and actuals, re-enforcing the perception that budget management is disconnected.
In a recent column for AccountingWEB, Andy Shambrook observed that “Data answers the question of what”. He continued, “More specifically, what happened in the past and what we think will happen in the future (in the case of a budget or forecast). Yes, budgeting and forecasting are future-looking, but if all we are telling people is what we think is going to happen, it’s still just data.
“Data only becomes information when we answer the question of why. And not some crappy why like phasing, accruals, and one-offs. We want to give people root commercial drivers.”
One part of providing information, and not just data, is interpersonal relationships.
The other part is technological. In a recent guide ‘Managing budgets and approvals’, Zahara, a cloud-based accounts payables automation system, noted that:
“To achieve the business objectives, the strategic plan needs to be broken down into manageable parts covering the various operations of the business (eg operating budgets, capital investments, cash) and the time frames over which the management can deliver the plan (annual, quarterly, monthly).”
What specialised software lacks in Excel’s flexibility, it makes up for in its ability to more easily draw in different stakeholders. This process is critical for budgets to be effectively controlled and requires a cloud-based platform to ensure effective communication of the budget, consumption and performance, Zahara’s head of partners and alliances John Samuels told AccountingWEB.
“Organisations create budgets at senior management level, but then what we see that spreadsheet will not be disseminated to the rest of the business and it’s dusted off at the end of the year. We’re not only concerned with setting budgets but also budget enforcement and management.”
Zahara operates as a sort of budgetary halfway point between the finance function and departmental managers. “You can work at the departmental level. As POs are raised against the budget, it’ll be automatically factored in,” said Samuels. “And the finance manager can set workflows. So if costs are being overrun, it’ll automatically be flagged for approvals.”
Ultimately, Samuels argued, budgeting needs to be linked to a purchasing mechanism. “Cashflow problems shouldn’t manifest at an invoice level,” he said. “If you can lock down every purchase and enforce budgets properly, you can stop problems before they occur.”