Smart Finance
Budgeting on its head, 7 tips learnt through actual practice Laatst bijgewerkt: 15 February 2017

In recent years, I have helped various organisations make their budgeting process more efficient, more effective and more pleasant. When I first set foot within a company, I mostly hear complaints about the creation of the budgets. For most people, this is a time-consuming job and the internal communication concerning budgets generally leads to frustration and incomprehension.

For most organisations, the Finance department is the initiator for setting up the annual financial budgets. The strategy and objectives, formulated by executive management, usually form the starting point for this process. The annual goals are converted to a budget in P&L form, which is discussed with the budget keepers (who are often department managers). The process of collecting all the information to arrive at a good budget and the process of coordinating the budget are time-consuming and – on many levels – frustrating. Everyone in the organisation has the feeling that things can be done differently, but how? How do we make the budgeting process something to look forward to?

Let us first look at the two main causes of the problem:

  1. The language barrier between the Finance department and the budget keepers (the ‘business’)
  2. A complete top-down approach to the budgeting process

 

Blog Kadenza

 

language barrier? Yes, because where the Finance department talks about cost items and general ledger accounts, the department managers talk in business terms. After all, they are responsible for improving the sales, for the development of new products and for the optimisation of production. How exactly that is expressed in ‘general ledger language’ is irrelevant to their plans. They must come up with the necessary price increase to achieve the desired revenue increase. Or they must decide which restructuring is required to achieve the desired cost savings. Or how to save costs on the production line. Budgets in P&L form are not just difficult for these managers to understand, but also make these managers feel considerably less responsible for these budgets because they are not drawn up in their own language.

Another reason why many managers feel little involvement with and commitment to financial budgets is the pure top-down approach which is mostly opted for when drawing up budgets. The chance that a budget keeper will also feel truly responsible for his or her budget is naturally much greater if he or she is also able to take some initiative and has a say in things, and can thus influence the establishment of the budgets. In other words, a bottom-up approach. An approach in which managers receive guidelines and principles from executive management, but create the budgets themselves – in their own language. This working method does indeed cause more work with the iterative consolidation of the departmental budgets to arrive at a corporate budget that matches the strategy, but at the same time ensures a support base and commitment in the organisation.

 

Bottom up

 

In actual practice, tackling these two causes appears to take away much of the frustration and time constraints associated with the budgeting process. However, this is easier said than done. I have therefore listed seven tips for you, learnt through actual practice.

1. Budgeting on its head or not?

Is your budgeting process indeed structured top-down? And do you want to keep it that way? In that case, you must put a lot of work into eliminating the language barrier, in other words, translating the financial budget to business terms that are comprehensible for department managers. Or, are you already working bottom-up (to some extent)? In that case, be sure to spend time explaining the principles and prerequisites to the budget keepers, as well as the need for and importance of a good budget, so they can assume the responsibility for the budgeting process. Or do you perhaps opt for a combined approach where Finance and business meet halfway? Be sure to ask yourself, in advance, which approach is best for your organisation.

2. The process first

It is tempting to immediately go in search of software that will help you make the budgeting process more efficient. Even so, it is wiser to start with the process first. Start with the coordination and implementation of the budgeting process and first allow your organisation to get used to the new working method. Go over the entire budgeting cycle and ask for feedback, in the interim, in an attempt to optimise the process. After all, it is more difficult to introduce changes to the process once you’ve already implemented a tool. Moreover, introducing a new process and a new tool at the same time usually leads to too many frustrations. This approach often leads to resistance within the organisation and makes it difficult to pinpoint whether a problem requires a change to the process or software.

3. Don’t try to accomplish everything in one step

Take the time you need to change the budgeting process. Don’t try to adjust the overall process for the entire organisation in one step. Preferably start with the business unit that will benefit most from the new working method and where the least amount of resistance to change is expected. Use the experiences of the initial implementation for the rollout to the other departments.

4. Automate

Start to automate data preparation and consolidation as soon as possible. One of the most time-consuming activities for the Finance department is the collection and preparation of all the information that is required to be able to consult with budget keepers regarding their budgets. Consolidating departmental budgets is also a time-consuming job, which, moreover, must be carried out under immense time constraints. By actually automating these activities, you create leeway for Finance to consult with department managers, to jointly arrive at a better (substantiated) budget.

5. Prevent confusion of tongues

Be aware of the language barrier between the Finance department and the business. Make every effort to supply the information needed by budget keepers – to draw up their respective budgets – in the language that they understand. This will enable them to also express their opinions about the feasibility of their respective budgets and the plans for sticking to these budgets. Business controllers can play a major role in eradicating the language barrier and preventing confusion of tongues. They can do even more than that! For example, by challenging the department to proactively (or even combatively) make the policy and processes more effective, more commercial and more profitable.

6. Acquire a planning tool

Has your process changed and do you want to increase your efficiency even more with the utilisation of software? First take a moment to assess the phase in which your change is. If you are not yet done with the process, it might be advisable to refrain from opting for a full-fledged planning tool now, and to stick to Excel for the time being. The necessary changes are then easy to implement and most people in your organisation have experience with Excel, which means you won’t encounter extra resistance. Are you further along in your reorganisation process and is the coordination between the Finance department and the business running smoothly? In that case, I advise you emphatically to consider a professional ‘planning & budgeting tool’. This not only increases the effectiveness and verifiability of the numerical budgeting process, but you also maintain control over the relevant process. You can read more on the advantages of such a tool in the blog entitled ‘Put an end to your financial spreaghetti!’ by Amarins van de Voorde.

7. Report and adjust

Ensure that the process of drawing up your budgets does not remain a one-off, annual exercise, but render your figures suitable for interim progress checks. The first important step towards achieving this is to divide your budget into quarters, months or even weeks. By frequently comparing the actuals to the budget, you can regularly assess where deviations are popping up and make adjusted forecasts based on the latest developments. This enables one to make adjustments on time. Do you want to know how to create a financial forecast? Read the blog entitled ‘The financial forecasting top 5’ by Jeroen Zeeuw.

Budgeting becomes fun!

By tweaking the budgeting process, communicating differently and incorporating the right tools, the time constraints and frustrations that you are currently experiencing will diminish. Even more important: budgeting will become much more fun! The Finance department and the business will have time to make plans to achieve the corporate goals, together. By – in a better way – telling the story behind the numbers and giving departments more say in the establishment of their budgets, you will automatically acquire increased mutual understanding. That understanding ensures the support and involvement in the organisation, which are so badly needed if one wants to achieve ambitious goals!