Category Archives: business budgeting

What does the Annual Budget Mean to you?

Close-up of business documents lying on the desk, office workers meeting in the background

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 ( 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.

Vow to Make Business Budgeting Reasonable

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.