Budgeting Maturity - Part 2

In this series of blogs we are covering the different stages of budget maturity. In my last blog I outlined budgeting when it is run as a head office exercise. I went through the pros and cons, and suggested ways in which it could be improved. In this blog I’m looking at budgeting when it is run as a departmental exercise.
In this approach to budgeting, departments are actively encouraged to get involved in the numbers guessing game. The data being collected is still based on the organisation's chart of accounts but this time each department is provided with their own customised spreadsheet. This contains the latest actual results into which they can enter the budget for next year. Being customised means that the data requested is tailored to what they do, and where items such as salaries are attributable to named people. This stage of budget maturity appears to departmental heads as being ‘their’ budget, although they are often restricted in terms of the numbers they can submit. Quite often, data that is sent is rejected as not being in line with corporate goals and so a number of iterations are required to complete the process.
The pro’s of this approach is that departments can see that some attempt has been made to get their point of view. After all it has been customised to their involvement, although this is still limited to what is contained in the chart of accounts. It also enables head office to set targets which departments can see, which are then contrasted with what they submit.
The con’s are:
  • The budget process is still a numbers adding up exercise. It’s based on an accounting view of the business and apart from providing the odd comment, departmental heads are constrained in getting their point across to senior managers.]
  • The use of spreadsheets is now a major issue as each one needs to be handcrafted and individually managed. For more on this see my article on spreadsheet hell.
  • The link to strategy is tenuous. Sure there are strategic targets, but as with head office budgeting, there is no real discussion on how activities need to change, why they need to change, and the resources that are necessary to effect that change.
  • Finally, senior management continue to be frustrated at the seemingly inability of departmental heads to see the ‘big picture’ and to move away from the budget game playing that continues to go on.
There are some big improvements that can be made in the area of automation. As with head office budgeting, moving to an enterprise budgeting software solution can streamline the whole process as well as improving the integrity of numbers being reported. Enterprise systems can also be used to capture forecasts and report actual results, but on an individual department basis without too much effort being required at head office. Built-in reporting capabilities allow departmental heads to create their own reports and analyses But what’s really missing is the link to strategy. Somehow the budget must get connected to the purpose of the organisation and how it intends to deliver strategic goals. This can be found in the next stage of budget maturity, that I’ll cover in the next blog. In the meantime, if I can be of help to organizations that are looking to improve their planning and forecasting process, do get in contact.