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Home / Expert Opinion / Keeping Your Balance: The benefits of budgeting – new approaches

Keeping Your Balance: The benefits of budgeting – new approaches

Mark J. Kovaleski

It’s clearly a budget. It’s got a lot of numbers in it.”

— George W. Bush

The budgeting process is not a glorious task. It is often extremely labor intensive, an exercise in number crunching and adds little or no value to the company. The traditional bottom-up budget technique exhausts the financial resources of the company and the end product does not result in a financial forecast that mirrors the dynamics and realities of the business.

However, controllers and finance divisions can add tangible value to their businesses by using new approaches in the budgeting process that both enhance strategic planning and provide useful management information.

Before we focus on the effective ways to maximize the budget process let’s look at a few of the major flaws in the traditional budget process.

Calendar year or fiscal year-end budgets

These year-end budgets are the most common. Companies want to know where they expect to finish the year from a financial and tax planning perspective. The line items are easily measured and most controllers are comfortable with year-end numbers, which have been more carefully reviewed internally and perhaps externally and all adjustments have been accounted for.

However, this process isn’t flexible enough to allow for current changes in the marketplace, such as a recession or advances in technology. Also, the business world is a dynamic environment changing month to month that does not contemplate when your company’s year-end falls.

The budgeting process takes too long

Depending on the size of your company, the budgeting process can take up to three months. Larger companies would then have to wait for approval from management or the board of directors. This finished product often is a useless tool to management before they even have a chance to receive it. If the budgeting process is taking too long, consider eliminating some individual line items to help focus on the big picture. Ideally, the budgeting process should be performed continuously throughout the year in order to remain relevant.

Forecasts are made in a vacuum

The finance department should be in constant communications with the other departments in the firm. The most useful information can come from the sales and marketing department or from key revenue lines of the firm.

Most likely, a sweeping overhaul of the budgeting process is not necessary. The resources, systems and methodologies are already in place. The following are some small changes that can be easily implemented to provide a catalyst to building a better budget.

Automate the process as much as possible

Most accounting packages provide budgeting tools. Use them. Attempting to build a budget from a Microsoft Excel spreadsheet is time consuming and will not produce financial data in a format that mirrors your accounting information given to management. If your accounting package does not provide budgeting tools, there are many packages available that are useful and affordable.

Link budgeting to short term strategic planning

Making decisions without the early input of senior management and their expectations for the company will make the budget useless. Incorporating management’s expectations regarding earnings and growth, with current budgeting information will create the most realistic budget.

Tie compensation to budget goals

What are the rewards for various individuals accountable for meeting budgeting goals? Failure to meet budgeting goals is an item of frustration to many project leaders. The goals should be agreed-upon by the project leader and the budgeting manager at the beginning of the budgeting process. Adherence to these measures should then be rewarded through compensation increases.

Build support throughout the company

The budget should be everyone’s process, not just the responsibility of a select few. Breaking down the budget into small, understandable and attainable pieces will let everyone feel involved and accountable. If budgeting goals are met, all employees should be notified and participate in the benefits of a job well done.

Make management accountable for meeting budgeted numbers

The best budgeting techniques available are rendered meaningless if management is not accountable for meeting budgeted numbers. Meetings should be held monthly with all personnel assigned to a budget line to review actual versus budgeted numbers. These meetings should be attended by senior management responsible for the ultimate budget in order to lend enhanced credibility to budget accountability.

For most organizations, the budgeting process has to change. This change has to be accepted, embraced and put into action. The budgeting process does not need to be a painful, fruitless exercise. It can provide useful information that is tied to the overall strategy of the entire organization.

Mark J. Kovaleski, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP. He can be reached at Mkovaleski@mmb-co.com.