Budgeting. We all know we have to do it – but there are few organisational processes that generate quite so much resentment, excuse-making, avoidance and plain old-fashioned procrastination as the annual budget.
To those who are running the daily operations of the company, budgeting often seems like a rote exercise that’s a bit of a waste of time. So every year, the accounts department has the thankless task of nagging department and business unit heads to submit their budgets.
Why doesn’t the accounts department just add 10% to everything in last year’s budget and save everyone the trouble? Sadly, sometimes that’s just what happens. When it does, you might as well print the whole budget on toilet paper – because that will be the most useful thing you can do with it.
If you’re going to do a thing, do it properly. When a budget is done properly, it becomes an indispensable roadmap for the company’s journey: What are our financial goals? Are we on the right path to achieving those goals? Do we need to make a detour around an obstacle?
Ideally, the process of budget planning for the next financial year should give everyone in the organisation an opportunity to reflect on what they’ve achieved, what the external environment is telling them and where they want to go next. In times of recession, do we aim to increase revenues or simply maintain them? Which market segments are we going to target most aggressively? Where are the most profitable places to invest in new capacity, and where do we hold back? These are key strategic questions that should receive focussed attention by everyone in the business.
Getting everyone involved
But if you want an accurate, genuinely useful budget roadmap, you can’t do it by rote. A successful budget draws on the unique knowledge of everyone in the organisation. Only the sales team, for example, knows that the potentially lucrative new territory they’re opening up is so dispersed they’ll be spending a lot more on petrol next year. And the factory manager is more likely than the accountant to know that a key supplier is locked in a price war with its competitor and significant saving are possible.
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To make a proper plan for the coming year, you need to get this knowledge out of people’s heads and into the budget. That means you need to make creating and monitoring the budget as easy, painless and ideally rewarding as possible. You also need to ensure that all the information you have is centralised, up to date and easily accessible to everyone. This is the main reason why spreadsheets are a terrible budgeting tool – it’s too easy to save new versions, so that everyone ends up navigating by a slightly different map.
The new generation of web-based budgeting tools delivers both ease of use and transparent, accessible numbers that everyone can agree on. They also make it easy to keep track of the budget on a daily or weekly basis – it doesn’t help to find out you’ve been under- or over-spending six or eight weeks after the fact. Find out fast, so you fix it fast. Preparing a detailed budget each year, and then tracking your actual spend against that budget and managing the exceptions, is a discipline that every business should put in place early on.
The bottom line is that the more end users know about the company’s financial situation, the more they can take ownership and responsibility for it. But when forecasts are made and targets set centrally – by finance departments who may have little or no knowledge of what’s actually happening on the ground – buy-in evaporates. The knowledge of the end user is priceless, and your organisation should be able to tap into this through its budgeting and forecasting process.