It’s September and so for many organisations that means getting ready for the annual budgeting process. Everyone knows that it can be a time-consuming, pointless exercise and yet it's something that organisations continue to do year in and year out. For some it is a ritual conducted by the high priest of finance where costs are to be reigned in and revenues grown, despite what the economic forecast may show. For this reason over 70% of budgets are believed to be sandbagged. With other organisations it's an annual numbers guessing game facilitated by the handing out of spreadsheets upon which guesses are submitted and then collated, only to be rejected and participants asked to 'guess again' under the guise of budget pass 2. The game ends when senior management reveal the answer they had at the beginning of the process, which are now given to all participants as a top-down budget. In both cases, the process takes a long time – the average budget process is over 4 months long – with very few believing that the end result was worth the effort. In fact, 70% of all budgets loose their validity after the first quarter of the new fiscal year. The end result is dissatisfaction with the whole process. Typically senior management are frustrated as to why it took so long, and department managers reject ownership of the numbers that they feel have been forced on them with little or no connection to reality. As a consequence, no one sees the budget process as being a vital, value-added activity because the business will go on no matter what the budget ends up being.
There is no shortage of people wanting to ‘fix’ this sapping process, with some hoping to move up the corporate ladder by transforming it into a valuable management activity. The choices tend to be restricted to re-writing the budget spreadsheets, making better use of existing general ledger capabilities, or looking to implement a modern planning tool. But all of these approaches are likely to disappoint, as the problem they are trying to fix hasn't been properly defined. Solutions that are implemented tend to address ancillary problems and not the main issue that’s causing the budget process to fail. So how can an organisation improve their budgeting process? In the next blog I will look at the defining the purpose of the budget. This is followed by other blogs that go through 10 Key areas on how the budget process can be improved, each of which impacts the content of the budget and how it is conducted. If you would like to see all the blogs in this series as a single document then request our free booklet, the ‘No-Nonsense Guide to Corporate Budgeting’. Based on many years of experience in implementing effective budgeting solutions for hundreds of organisations, the booklet is aimed at those organisations frustrated with their current process and who want to transform it into a valuable management activity. We guarantee it will help you get control of budgeting and where the best use can be made of scarce company resources.