Budgeting Maturity - Part 3

In this series of blogs we are covering the different stages of budget maturity. In my last blog I covered the pros and cons of budgeting when it is run as a departmental exercise. In this blog we’ll look at budgeting when it has an enterprise focus.
One of the main differences with this approach is that budgeting plays a key role in achieving organisational goals. This is more than ensuring that individual departmental budgets are aligned with a set of financial goals set by senior management as we saw with departmental budgeting. Having an Enterprise focus means management recognise that it is the combined actions performed by individual departments in generating outcomes, which ultimately lead to the overall level of success achieved by the organisation. Therefore to achieve a designated level of performance, the right activities need to be planned, which in turn require sufficient resources to operate. This allocation of resources is the purpose on the budget in this stage. Enterprise budgeting cannot be performed within a general ledger. The data required includes operational statistics and the setting up of strategic initiatives to improve specific business processes, none of which can be adequately handled in a transaction system.   The budget process is also part of a much larger strategic and tactical planning process, and cannot operate as a discreet exercise as we saw when it is run as a head office or departmental exercise. To help create the right measures and business processes, organisations tend to adopt a management methodology such as the Balanced Scorecard, where budgeting plays the role of assigning the right level of resources required to achieve the organisation’s purpose.
The pro’s of this approach is that for the first time, senior and operational managers alike can see how low-level activities contribute to overall goals. They are also better able to assess whether the budgets assigned are realistic and represent ‘good value’.
The con’s are that it requires an enterprise budgeting solution that includes strategic, tactical and financial planning; that can collect forecasts and produce management reports. This itself produces further issues as the cost and deployment effort involved can be significant. It can also be very confusing, as vendors tend to offer multiple products that seem to do the same thing and use technical jargon that can be difficult to grasp and hence implement.
Despite the cons, organisations can make major improvements by adopting an enterprise budgeting solution. With the advent of cloud computing this need not be difficult or expensive. For more information take a look at my blog on exploiting the power of the cloud. In the next and final blog in this series I will cover budgeting when it becomes a continuous exercise, driven by exceptions and events.   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 at info@financialdriver.com. Michael Coveney