What a great and timely question… put to CFO Michael Beviss, who shares some realities of working with businesses to achieve their financial goals.
Here’s Michael’s answer…
Nearly everyone I ask this question will say yes, absolutely, and with good reason. Whilst studying and during my time working with businesses all but one organisation went through at least the annual budget cycle and some the quarterly forecasting cycle. Time, meetings, and resources that used to go into preparing annual budgets was significant. It could be anywhere up to 6 months out from the year end and it was time to prepare the budgets for the following year plus three- or five-year forecasts; templates and instructions sent to all the departments for completion, followed by meetings and ‘what if’ analysis. Then came the approval process, back and forth, change this, change that, then once the financial year started the budget was sometimes out of date, things had changed, so the quarterly forecasting would start or some insisted a new budget be prepared. There has got to be a better way. Perhaps rolling budgets/forecasts?
I would sometimes wonder if businesses are actually benefiting from complex and lengthy budgeting cycles. Don’t get me wrong, they are great at measuring standards and expectations so issues can be identified early on, however, are they providing value when they become “outdated” shortly after preparing them or as a measurement tool? Even then, some businesses still push to achieve budget when the goal posts have changed, which can be detrimental to the business – trying to achieve the unachievable.
It wasn’t until several years into my career that I worked with an organisation and asked, “where are the budgets?”, remember, as far I was concerned, they were essential. The response was “we don’t prepare them, as we measure against last year and try to improve year on year”. So, there was no time spent on preparing budgets, forecasts etc to the extent that I had experienced before and after working for this organisation. Last year’s figures were the measure and were used for forecasting and cash flow management. Capital items (Plant and Equipment etc) and once-off items were adjusted accordingly to allow for an “apples v’s apples” comparison.
Try selling this concept to businesses. It’s a tough call, however, if the budgeting process is not providing the value expected it could be failing your business and tying up significant resources at a cost to the business. Perhaps quarterly 12 month rolling forecasts may be an alternative, which are based on current business expectations.
This is an interesting concept, and controls are still put in place that traditional budgets provide, but it allows for the flexibility that many businesses are seeking by working with a live document. At the end of the day a business owner needs to understand where their business is heading based on current information (economic circumstances), not a budget that was set some 12 months prior where the goal posts have changed since.
Not only can businesses miss opportunities by sticking to budgets, but the concept “if it is in the budget does it mean we can spend it”? Well, no. This should not be the case at all. This can be a real nightmare for businesses where departments believe that if they don’t spend it, they’ll lose it. Having witnessed this approach, it is disturbing how much money businesses waste on unnecessary costs because of this mind set: “use it or lose it’. A question to ask is: if a budget is approved is the expenditure approved? Businesses should assess this practice and ensure expenses are appropriately approved and justified. What’s wrong with encouraging departments to defer expenses if things can wait with the promise that funds will not be lost if not spent? This approach will also assist businesses in meeting their strategic objectives with a disciplined approach.
Another limitation of budgets that I find has a detrimental impact on business is the mindset of “if it’s not in the budget then it can’t be spent’. This is fine if money is being wasted or spent for the sake of it. However, what if a unique opportunity comes up that could improve the profitability of a business? If a business does not have the funds, then okay, however, are these missed opportunities that could be considered investment opportunities going forward. Something to think about.
This concept can be rather enlightening, however, it does challenge the budgeting process that many of us are familiar with and acknowledge that standard budgets may still be suitable/required for many organisations.
Times have come a long way with technology to allow us to assess current practices and their contribution to businesses. I remember one of the first businesses I worked with telling me they used to do their budgets on butcher’s paper and lay it out on a big table. If a change was required, they would rub the numbers out with an eraser and then manually adjust the figures!!
As budgets are widely used its good to look at some considerations:
|Supports strategic ambitions||Can be static and don’t allow for changes in circumstances and reduce initiative (we’ll just stick to the budget and play it safe)|
|Allows for monitoring of actual revenue and expenses – know where money is coming and going and highlight where corrective action may be required.||Can become unattainable to achieve, causing grief where circumstances change.|
|Is a structured and predictable process||Budgetary slack where managers prop up expenses and reduce revenue targets to report favourable variances.|
|Give a running balance of the business’ financial performance||Can become outdated when finally approved and the budget period has commenced.|
|Set standards for what is expected||Can encourage unnecessary expenditure – use it or lose it mentality|
|Top-down budgets can be unreasonable and demotivating for staff|
For additional tips on Budgeting download our eBook ‘Our Top Budget Tip Sheet’.