How to Improve the Budgeting Process

The process of developing our budget is a laborious and intricate procedure that involves the participation of stakeholders from various departments, who contribute to, validate, and approve the budget.

Without clear communication and effective collaboration, there is a risk of having too many participants involved. Consequently, the likelihood of making errors increases, leading to a lengthy and inefficient budgeting process.

A recent study conducted by Gartner revealed that 72% of financial leaders are focused on enhancing the flexibility of budgets and projections for the respective fiscal year. Gartner reveló que el 72% de los líderes financieros están enfocados en mejorar la flexibilidad de los presupuestos y las proyecciones para el año fiscal respectivo.

This clearly indicates that more and more financial directors are weary of outdated methods and are focused on improving the flexibility of the budget and the overall process.

Chief Financial Officers (CFOs) are tired of outdated methods and are focused on enhancing budget flexibility and the overall process.

.In this dynamic environment, your organization cannot afford to lag behind. Fortunately, technological advancements have given rise to the emergence of financial planning and analysis tools that are revolutionizing the landscape. herramientas de planificación y análisis financiero que están revolucionando el panorama.

In this article, we will focus on the benefits of having a streamlined budgeting process, uncover common weaknesses, and discuss how to optimize your company's budgeting process.

What is the Budgeting Process?

The budgeting process is a project management process that involves assessing and analyzing a company's financial position.

The budgeting process is a continuous cycle of planning, preparation, implementation, and control of an organization's budget, with the aim of optimizing resource allocation and achieving strategic and operational objectives.

It entails planning and controlling the expenditure of funds over a specified period and forecasting the resources needed for different projects based on the overall strategic goals of the company.

 

Why is the Budgeting Process Important?

The budgeting process contributes to aligning an organization's goals and objectives with the projected revenues and costs to cover its operations.

This provides a more strategic perspective on financial matters, placing the organization in a stronger position to build a robust financial foundation. Additionally, the organization remains flexible and adapts to changing market conditions.

Moreover, your organization identifies and prioritizes its financial needs, which helps determine whether additional funding from banks and investors is required to meet its obligations.

The budgeting process enables each department to be aware of the availability of monetary resources over a specified period. This guides project prioritization, ensuring alignment with the organization's overall strategic objectives.

Furthermore, the budgeting process allows the finance department to stay informed about activities in each department. It collects data and monitors expenses to identify different needs in each area. This allows adjustments to be made based on requirements for the upcoming fiscal year.

Budgeting is a complex process by default. It involves people, data, and processes at various stages, and each of these stages requires significant time and resources.

 

Common Errors Impacting the Budgeting Process

Outdated Models

Outdated models result in passive participation in the budgeting process, causing teams to underutilize available data and make meaningful contributions. For instance, many companies start budgeting at least six months before the start of the next fiscal year.

One example of an outdated model is the top-down budgeting approach. Here's how it typically unfolds:

The vice president of sales instructs the sales team to initiate the budgeting process.

The sales team gets to work, identifying and forecasting their revenue goals and how they will manage expenses based on available data.

The sales department sends the budget to the sales executive for approval.

Unfortunately, the executive team returns the budget with figures that the team is expected to achieve, nullifying their plans, assumptions, and forecasts.

This poses a problem as it misaligns the team with the budget and exposes them to potential market deviations that could hinder the new figures provided by the executive team.

Poor Planning

If you find yourself starting from scratch every time you create a budget, it indicates poor planning.

During a specific financial period, numerous events occur. If you haven't been collecting data over time, you'll be in a situation where you have to begin the planning process from square one. Moreover, suppose you don't have enough time to research and consult with all the individuals who need to contribute to the budget. In that case, you'll overlook crucial information that is essential for making your budget more effective.

Poor planning is not limited to starting from scratch on every occasion; it also extends to inefficient workflows.

Inefficient workflows fail to clarify the duties and responsibilities of each stakeholder in the budgeting process, resulting in a lack of clarity and conflicts that hinder effective collaboration.

Lack of perspective and agenda cost.

The amount of analysis and level of detail involved in the budgeting process require bi-directional communication among various individuals and departments.

These negotiations open the door for politics and team members to focus more on what needs to be done rather than why it's being done, which is detrimental to both the company and its clients.

For example, a mid-level manager whose incentives are tied to revenue targets is likely to underestimate revenue projections, thereby facilitating the achievement of those targets. This affects the company's performance in the next financial period.

In other cases, departments vying to outshine one another withhold information. This fosters a compartmentalization mindset, implying that the data in the final budget will not be comprehensive at all.

The budget does not reflect the company's strategy and objectives.

When top and lower-level managers set divergent goals, budgets are created that do not align with the company's strategy and purposes. For instance, if performance evaluations for lower-level managers are based on achieving revenue goals, budgets will be created to maximize profits and return on investment.

In general, this may not necessarily be harmful. However, if the company's goal is to ensure the marketing of high-quality products, then a budget solely focused on revenue and profits will lack alignment with overall objectives, negatively impacting the company's overall performance

Steps to Optimize the Budgeting Process

Optimizing the budgeting process goes beyond merely completing the budget quickly. It also involves ensuring the availability of accurate and flexible data to adapt to changing market conditions throughout the year.

This perspective positions you favorably to improve revenue operations, cash flow, and the organization's competitiveness. An optimized budgeting process provides an opportunity to enhance existing workflows and make more informed financial and business decisions overall.

 

1. Agree on objectives and goals

The overall goals and objectives of your organization will be crucial in shaping the final budget you will implement.

Before embarking on the budgeting process, it is important to agree on the company's goals and objectives. Then, ensure that all stakeholders involved in the budgeting process understand how the budget will contribute to achieving those goals.

Start by assessing what worked and what did not in the previous fiscal year, as well as the lessons you intend to apply in the future. Reviewing your existing financial information will raise questions such as:

• Were the allocations within budget estimates, or was more spent than anticipated? For example, did expenses related to personnel stay within initial estimates?
• Did the previous budget help you achieve your growth objectives?
• What challenges did you face in implementing your budget? Did you gain acceptance from all members of the company?
• What was the impact of the tools used during the budgeting process in terms of collaboration and communication?

Con estos aspectos en mente, ya no se encontrará en una situación de enfoque «de arriba hacia abajo», donde los altos ejecutivos establecen metas de ingresos que no se alinean con los datos disponibles en cada departamento.

Similarly, middle-level managers will not be tempted to create valueless budgets.

2. Plan your entire process and support your team

To achieve this, firstly, identify all stakeholders and notify them about critical budgeting deadlines, such as the start and end dates. Then, break down each stage of the process (e.g., review and validation) with different dates: set constraints for each stage to assist the team in adhering to the established timeline.

Para lograr esto, en primer lugar, identifique a todas las partes interesadas y notifíqueles acerca de los plazos críticos del presupuesto, tales como la fecha de inicio y la fecha de finalización. A continuación, desglose cada etapa del proceso (por ejemplo, revisión y validación) con fechas diferentes: establezca restricciones para cada etapa que ayuden al equipo a cumplir con el cronograma establecido.

 

During the budgeting process, for example, obtaining real-time data on accounts payable is necessary. This will enable you to make accurate forecasts and make informed decisions regarding your procurement process.

To avoid multiple iterations, schedule meetings for teams to share relevant information and discuss any discrepancies that may arise from the data they possess.

If you have encountered difficulties with different departments not delivering their budgets on time, conduct regular check-ins with them to get updates on their progress. These records will also help you identify any challenges, such as balancing workload and budget, and address them from the outset.

For instance, in situations where different departments have disagreements and each wants to defend their own goals and specific allocations, you can resolve it by reminding them to align with the organization's objectives and targets. 

3. Organize and centralize documentation

The budgeting process involves the participation of various individuals and departments, which leads to necessary data being stored in different locations. Manually sharing access to this data creates unnecessary delays in the budgeting, validation, and approval process.

If any stakeholders do not have timely access to the required data, the entire process comes to a halt due to last-minute changes from the different involved parties, resulting in further delays.

In addition to the inconveniences of manually granting access to all involved parties, control over who has access to which information can be lost, potentially leading to unauthorized access to sensitive data, such as human resources metrics that should only be known by a select group of individuals.

To avoid this situation, it is advisable to organize all data using a cloud-based solution that allows storing all information in a single location. This facilitates access for all involved parties during the budgeting process while ensuring data confidentiality.

4. Utilize budgeting software

The individuals involved in the budgeting process have varying levels of skills. For example, if spreadsheets are used, some team members may face difficulties with formulas and manual data entry, leading to delays and errors during the budgeting process.

Key stakeholders obtain data from different sources, making it challenging to ensure data accuracy and track who inputs information into the spreadsheet. Having this information will help you understand the context behind the entered data and its source.

To level the playing field and improve workflows, communication, and collaboration, it is recommended to use enterprise budgeting software. This type of software also allows you to identify inconsistencies in your data and track changes, so you can know who did what and address any discrepancies in the data. 

5. Distribute the final budget to the appropriate stakeholders

Once you have prepared the budget, it is important to ensure that relevant stakeholders review and approve it. To avoid unnecessary suggestions and constant adjustments, I recommend creating digital copies and sharing them with those who need to review, keeping them open to suggestions.

Establish a clear deadline and inform reviewers that if they do not provide suggestions before that date, the budget will move to the approval stage, preventing last-minute suggestions.

A company's budget plays a critical role in its operations. Therefore, many organizations are constantly seeking ways to optimize their budgeting process and maximize available resources.

An optimized budgeting process will allow you to collaborate and communicate effectively throughout the entire process, resulting in higher-quality budgets and improved business performance and growth.

References

https://akademiun.com | https://avacum.com | https://hbr.org |

www.pdv-a.com |