I've often written about the budget process and ways in which it can be improved. It's seen by many to be manually intensive, that takes too long, and where the figures set have no basis in reality. But it need not be like this. There are companies whose budget process adds real value to the business and where resources are allocated for maximum effect. So what's the difference between the two approaches and how do organisation's transition from one type to the other? As with most things, there's not a straightforward answer, but there are signs that organisation's can use to judge where they are on the 'journey'. I've categorised these into the following 4 stages of budget maturity.
- Stage 1: Head office exercise - this is where budgeting is seen and run as a process to serve head office needs.
- Stage 2: Departmental exercise. In this stage departments are more involved and work together with senior management in allocating resources.
- Stage 3: Enterprise focus. This third stage recognises that budgets play a role in achieving organisational goals and so are linked to strategic initiatives.
- Stage 4: Continuous planning. This final stage is where budgeting becomes a continuous exercise, driven by exceptions and events.
This approach to budgeting has its purpose in the creation of a consolidated budget that can be fed back into the general ledger. It's typically controlled by one person and uses spreadsheets to capture the data. These spreadsheets are the same for every department and are either blank or contain current year actual results. Users are expected to fill these in based on what was spent this year. At head office the spreadsheets are consolidated by copying individual sheets onto a master sheet. This is then used to produce a consolidated budget report. Once accepted, the data is transferred to the general ledger and the sheets are thrown away. All actual vs budget reporting is conducted from the general ledger based on existing departmental and account code structures.
The pro side of this approach is that it's fairly simple to operate. Budgets can be easily generated by applying a global percentage to last years figures. There is no need to provide users with comparatives and no need for version control as the only data that is valid is that held by head office.
The cons are that the process is basically a numbers adding up exercise. There is no understanding of what departments will do with the resources allocated, whether the resources assigned are realistic or if they are well used. There is definitely no link to strategy and departments will see the process as being disconnected to their role in delivering organisational value. With this type of process, senior management are typically frustrated as they seem unable to get the organization to adapt to changing market conditions or to implement any new strategic initiatives.
The only improvements that can be made to this type of process is to consider automation. For example, the spreadsheets could be replaced with an on-line budget collection solution that would eliminate the need to hand out, collect and collate budget returns. The same system could also be used to automatically generate the budget pass by the use of rules to uplift current actual data. The real issue with this approach is the purpose. Do we really want a process whose focus is on feeding numbers into the general ledger? General Ledgers were designed to make the recording of transactions easy so that monies in and out of the organisation could be better tracked. But they have nothing to do with better planning and how best to assign organisational resources to achieve future goals. That requires a different approach, as we'll see later on in these blogs. In the next blog in this series I will take a detailed look at stage 2 of budget maturity - departmental exercise.