How different functions in the company have different views on the process
In all but the smallest companies there are quite a few people involved in the annual budget preparation. While finance generally owns the process, every division and department in the company has something to do with it. As such, many employees are familiar with at least their piece of the process and even though (and admittedly) many loath these activities, they all have their own unique point of view on the process and its purpose.
Let’s start with division or department heads. These are people generally responsible for the P&L in their immediate area, be it a department, division or profit or center. To them, usually, the process starts two or three months prior to the end of a fiscal year. They are given templates of revenue and expenses to fill out and return to finance or the budget administrator(s) within the finance group. Some companies require a zero based budget, meaning every expense line must be individually entered and justified – a lot more work for department heads, but we would assume they are accustomed to doing this.
To them, the budget represents the anticipated performance of their business units, such as sales, expenses, profits and losses communicated through the budget; perhaps proposed growth through release of new products and services, cost savings, etc. Usually, their budget preparation responsibilities end at their department level. During the budget year they try to perform within the budget constraints hoping performance falls within budget or perhaps even exceeds it.
In companies where periodic analysis occurs, these people are questioned when their business unit’s performance exhibits variances from the budget, and operational changes as well as reforecasting often occur.
The budget administrator (more than one in larger companies) is concerned with releasing budget worksheets or templates to budget participants. They also collect these data and incorporate them in a consolidated corporate budget book. If their company still uses a set of spreadsheets (which we all know by now is a very bad idea) in its budget preparation process, they are in charge of maintaining these spreadsheets, the programming of formulas, functions, links and macros, and most notably, continually troubleshooting these spreadsheets.
If the company is fortunate enough to be rid of their spreadsheet-based budget, these budget administrators are focused on maintaining the budget model, releasing and collecting electronically filled-out worksheets from the various budget participants, consolidating the many budget sheets into a corporate budget book and handling all revisions and iterations of the budget until it is approved. Then, some may perform analytics functions, usually based on their system’s capabilities and company mindset.
The VP or Director of Finance, or in smaller companies the Controller is involved in budget reviews and modifications throughout the budget preparation process and then, hopefully, in reviewing the periodic analysis performed during the budget year. Traditionally, their primary concern is accuracy and completeness of the data, and understanding variances of actual performance from budgeted numbers.
The company CFO, together with the CEO and Board of Directors are mainly concerned with the completion of the budget preparation process and in its approval, as well as periodically reviewing analysis results and questioning performance of the company in response to variances from the budget. In most companies with a traditional purpose designed budget and analysis solution there is not much more they can do.
However, there is a lot more they should do. The CFO should always forecast the future financial position of the company (a.k.a. the future financial health). This can only be done through obtaining a complete and accurate forecasted Balance Sheet, one that is synchronized in real-time to the forecasted Income Statement which is always derived from the underlying budget. We already know that next-generation budget and analytics software solutions such as Budget Maestro by Centage Corporation (www.centage.com) were designed to do that.
Next-generation budget tools are used on all levels of the budget preparation and analysis process; each user category described above is a participant in the system; each has a set of responsibilities and access to the areas most appropriate to their function in the organization.
Budget administrators no longer have to struggle with unwieldy budget models that never work properly and where different pieces are broken at any given time. They can now focus on properly administering the process, collecting reliable and timely data from budget contributors, compiling reports and generating output that can be relied on.
CFOs can finally have the tools they really need. Through smart budgeting technology they have access to a budget that is an extension of their company’s actual accounting system. They can now see what their company’s Balance Sheet will look like in the future and test more than one version of the budget to see the effect on the forecasted Balance Sheet. Most importantly, they can initiate changes in response to actual results compared in real-time with the approved budget.
CEOs and companies’ Board of Directors can finally rely on the budget and analytics processes to be able to ask the right questions and respond much quicker to actual business changes. This also extends beyond the company to shareholders, customers and vendors, all indirectly benefiting from the results of a well-executed and managed budget and analysis process.