business budgeting

It’s time we take a serious look at this process and vow to make a positive change

I was just reading a discussion on titled “Vow to Make Budgeting Reasonable,” initiated by Proformative member Mary Driscoll, a senior research fellow at the American Productivity and Quality Center. This post and its various member responses (including my own, encouraging more people to participate) touch on a critical subject: The corporate budget process and how convoluted and unreasonable it can be.

My contribution to this discussion was that no matter how reasonable or unreasonable the business budgeting and planning process may seem to some of its participants, and however companies arrive at their budgets, there has to be a way to turn the budget into something much more meaningful and useful for company managements to rely on in making timely and informed decisions.

I pointed out that budgets must be able to automatically generate a complete set of financial statements, and not just the commonly produced income statement, which is simply a list of revenues, their associated costs, and other income and expense items, plus a provision for income tax expense.

However, many organizations, regardless of the software they use to generate the budget, stop at just the income statement. Whether they monitor actual results against this forecast, their process is never going to be complete.

I could argue that any reasonable person managing the process, or any member of senior management should know that a forecasted P&L does not tell the whole story. What is really missing is a forecasted balance sheet, one that many companies ignore altogether, or at best think of as nice to have, but technically unattainable due to the limits of their budgeting software, or use of only spreadsheets.

The few that do produce a calculated forecasted balance sheet, and maybe also a statement of cash flows, do it using high-level formulas and assumptions, since they can’t rely on every single budget line entry to individually contribute to the automatic generation of the forecasted balance sheet and its companion statement of cash flows. We can think of a forecasted balance sheet as a set of beginning (and known) account balances, plus all changes to these account balances resulting from future accounting transactions, derived from all budget lines and their attributes.

Is there a way to make the budget process and its outcome more reasonable?

That depends on the individual company’s financial leadership and management mindset, and how open they are to investigating and implementing more current methods and technologies – and whether they realize that traditional methods not only are unreasonable, but also can be dangerous, as we explored in recent blog posts: Planning, Budgeting and Forecasting: Why Tradition May be Dangerous – Part 1 and Part 2.

What I do know is that the planning, budgeting and analysis processes must have defined and clear benefits to the company, and simply following tradition can be a waste of time and resources. There is no reason to do something you are not going to benefit from.

As a finance manager, do you truly believe that the data available from your company’s budget is the best it can be and that senior management can reliably use it to make important decisions? Can your existing budget give you meaningful insight into the future financial health of the company? Wouldn’t a forecasted balance sheet that is always synchronized in real time to its underlying budget (and the P&L) be much more useful – and let you explore critical financial aspects of the organization that a P&L simply can’t reveal?

My personal experience working with Budget Maestro from Centage Corporation, shows that the budget process and its outcome can be reasonable to its users, and can afford significant benefits to companies and their managements, even for smaller and medium-size companies. This is exactly what I discovered long ago when I vowed to make my company’s budgeting process reasonable.