Budgeting Tips and Tricks
Budgeting is likely not high on your list of favourite things to do – or anyone else’s, for that matter. Nonetheless, budget time comes around each year like clockwork. Business units complain about the amount of time the process will take and managers grumble over conflicting goals.
Meanwhile, it’s up to you to ensure that the budgets are submitted and approved on time.
All you can hope for is that this exercise will be of some value to somebody, for some amount of time.
Simplify your budgeting process
It doesn’t have to be like this. It’s time to stop and look at your budgeting process.
The following are suggestions on how you can simplify your budgeting cycle, make the process less painful, and ensure that your organization gets the most out of its budgeting, planning and forecasting activities.
#1 Align the Budget to a Strategic Plan
In many organizations, the budgeting process is often completed in a silo – independent of the strategic plan – which can create a disconnect at the operational level. The budget may communicate targets and focus energy and resources on areas in the near term that are not aligned with the organization’s long-term strategy. A budgeting process that is aligned with the strategic plan can better focus the allocation energy and resources towards delivering on business objectives, tracking progress at an operational level and identifying and closing performance gaps.
#2 Create a Clear Process and Workflow
Many times, Excel workbooks are sent out to all the different managers that are involved in the budgeting process to be completed and submitted. Then the finance team consolidates all of the numbers in an effort to push out the budget for that year. In other words, there is typically a lot of time lost to administering the budgeting process.
The next tip is to have a process that is clear, transparent, and also visual. With budgeting technology available today you are able to deliver a visual workflow. This gives people a clear understanding of the steps in the budgeting process, when those steps are due, and whether or not they are complete. Having an automated workflow and progress reporting allows a budget supervisor or someone involved in the approval process to see how many contributors are in progress, how many have submitted their numbers, how many submissions have been rejected or approved, and whether there is anyone having challenges who may require assistance.
With a visual workflow, processes are more transparent and flow more smoothly with less need for manual checks and interventions along the way. Budget contributors and the finance team spend less time on the budget administration, leaving more time for analyzing the data and taking action.
#3 Improve Accessibility
A major challenge that many organizations face is making it easy for contributors to complete the budget regardless of where they happen to be physically located.
There are solutions today that provide flexibility to budget contributors, offering them a variety of tools whereby they can access the budget application and submit their entries on time. Whether they are using a laptop or a workstation in the office, or if they are out of the office with access to a tablet, phone or other mobile device, there are modern budgeting solutions that give the ability to enter budgets on time using whatever device is most convenient. Even if contributors are out of range for the Internet or on a plane, they have the ability to enter data offline and upload the data to the budget when they have connectivity at a later time.
#4 Driver-based Planning
Have you ever wondered how meaningful a budget is if the input required is not controllable or meaningful to the budget contributors?
Using driver-based budgeting – an approach that bases financial forecasts on operational drivers – data can be broken down beyond the financial values into sub-components and drivers that the contributors are more familiar with and have more control over. For example, the rates can be established up front and then the business unit managers simply input the units or values they control. The budgeting application then uses business logic to calculate the output automatically.
For example, on the sales side, you may ask a sales manager to enter the number of product units they are planning to ship, or the number of service hours they are planning to bill. The standard prices may be fixed in the system but they are given the ability to add a discount if required.
On the payroll side, HR would set up the various employee pay grades in the application with appropriate benefits, taxes, fringe benefits, pension rates, etc. This means that the cost centre managers need only consider the headcount and work schedule for the people who work within their cost centre. They key in the date of hire and the pay grade (or employee class if that’s relevant) and everything else is calculated automatically using business logic.
With capital expenditures, the different asset classes and depreciation rates would be set up in the system so that cost centre managers need only enter the type and number of units, and perhaps the price of the asset they are buying. Other calculations such as depreciation would update automatically.
Setting up a driver-based plan provides a more dynamic platform for testing scenarios and simulations using the different drivers. This leads into the next tip, “Test Scenarios and Simulations” – it will appear in our next blog article in a couple of weeks time.
#5 Test Scenarios and Simulations
In many cases, when budgets are being developed by teams it is an exercise of entering what is “expected to happen.” Teams may simply enter their best guess into the template and then they are done for the year – the “chore” is over.
Now imagine how much more meaningful and interactive it would be if you could provide those teams with the ability to test different scenarios and do simulations in order to test their assumptions.
In fact, there are software solutions that provide the capacity to set up models that allow for these comparisons. Contributors have the ability to look at best case and worst case scenarios and make comparisons. For example, if we want to achieve our target growth in sales next year, how many more units would we have to sell and can this volume be achieved at this price? What would happen to our bottom line if the exchange rate changed dramatically next year? As these realities begin to play out through the year, the budget can be adjusted accordingly to enable easy re-forecasting of the rest of the year.
#6 Support with Explanations
The next tip is to support budget entries with explanations. What good is it to enter values into a budget without adding comments or annotations to explain where those values are coming from?
For example, if there is a spike in units in July for some reason, how do we find out where that spike is coming from? When you are building next years’ budget and looking back at the previous year you see no explanation for that spike, you will have to track the person down and hope they remember their reasoning.
There are budgeting solutions available that provide this ability to store comments and supportive documents as attachments that are tied to particular data points. This feature provides value to the budget reviewers who are able to understand where the values are coming from, as well as to the budget contributors who can look back at last years’ budget and review their own comments and assumptions which may well have some relevance to the upcoming budget year.
#7 Reforecast, Reforecast, Reforecast!
A classic problem with completing an annual budget is that it essentially loses accuracy as the year progresses. Assumptions are made at the beginning of the year, but the reality is, things change in ways that are unpredictable. After a month or so, the annual budget often becomes irrelevant.
The next tip is to reforecast, and do this by enabling contributors to easily update their budgets throughout the year. As opposed to doing budgets annually or even biannually, make the process so simple that they can do it quarterly or monthly.
Budgeting applications allow individuals to look at the actuals for the year-to-date and then reforecast for the remainder of the year, or perform rolling forecasts so that the budget remains accurate and relevant all the time.
#8 Automated Reporting, Charts, KPIs
A big challenge many experience is the time involved in building and sending out monthly reports to the different groups within an organization. Closing out the month, doing variance analysis in Excel, and sending out the management reports manually each month puts a lot of strain on IT and finance – and that’s before different groups start asking for ad-hoc reports and data!
So the eighth and final budgeting tip is really a no-brainer. Automate it!
There are budgeting tools that actually automate reporting, charting and KPI dashboards and make them accessible to everyone as needed. These tools also give business users the ability to do ad-hoc reporting on their own, greatly reducing the strain on finance and IT.
At the senior management level and the board of director level, it is even possible to provide an interactive flip-book that is accessible on any kind of device and automatically refreshes each time the database updates. This allows for highly interactive meetings and facilitates more meaningful data-driven discussions where members can drill into the data together. This also saves hours of time from finance and IT, the groups that were historically required to produce the various reports.
As you can see, while these eight tips focus around gaps that many organizations have in the budgeting process, a key piece in enabling improvement is working with the right budgeting solution. For information on applications that could help your organization plan and budget more efficiently and effectively, please contact us today!
Originally posted in the Mastermind Solutions Blog
Contributed by Thomas Ironstone
Thomas Ironstone, BMOS, MBA, has been a Business Solutions Consultant with Corporate Renaissance Group (CRGroup) since 2012. Thomas possesses a strong knowledge base in corporate finance and accounting His comprehensive skill set in performance management is applied in various projects, including activity based costing/management, Economic Value Creation (EVC), compensation analysis, corporate planning, strategic analysis, strategy maps, balanced scorecards, data visualization and reporting, project management, talent management, and change management.
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