Excel is the #1 financial modeling tool on the planet. And unless you look outside of Microsoft Office, it’s the obvious choice for budgeting. That’s the reason why 80% of all organizations continue to use Excel for budgeting. But here are some common complaints heard every day:
- The process takes too long
- The process doesn’t deliver business value
Let’s take a look at Excel and see why these very legitimate complaints are raised. If you are considering improving your budget process, these are fundamental problem areas that will need to be addressed.
THE PROCESS DOES NOT DELIVER BUSINESS VALUE
Let’s tackle the harder one first (you’ll see that by comparison, making the process faster and more efficient will appear easy).
- The value of the planning process is diminished to whatever extent it fails to reflect the strategic intent of the organization. While not every organization has a formal strategic plan, every organization has goals and important objectives it’s trying to achieve. If that’s not reflected in the budget – clearly identifiable – budgeting will lack business value.
- The value of the planning process is diminished to whatever extent that managers can’t budget the way they think about the business… managers tend to think in terms of marketing campaigns, strategic initiatives, IT projects, events, programs, and other important actions. This is where “the meat” of the budget is, but reflecting all this in budget templates is extraordinarily time consuming and is simply not practical (using Excel spreadsheets).
- The value of the planning process is diminished to whatever extent the real world is ignored, and “budget guidelines” become “budget handcuffs.” Here’s a very simple example. The guideline for travel expenses is to remain flat with prior year (0% change). But the Sales department needs to increase their sales calls if they are to hit their revenue targets. Locking down an imposed 0% change might make things easy for the Finance department, but will handcuff the manager. Not surprisingly, managers disengage when these handcuffs are imposed, and it deepens their cynicism that the process lacks business value.
- The value of the planning process is diminished to the extent the rational for a budget is not communicated — readily visible and accessible. If you can’t answer “why” the budget request is being made, the budget process devolves into a numbers exercise (not a business exercise).
There’s more, of course, but if we can tackle these issues we’ll make extraordinary progress. Let’s take a look then at what’s required to overcome these challenges.
Requirements for Improving the Process
- The budget needs to identify the funding for distinct strategic initiatives – ensuring the budget reflects the strategic intent of the organization.
- The budget needs to capture marketing campaigns, IT projects, programs, events, and other proactive efforts managers plan on undertaking during the year — enabling managers to “budget the way they manage the business.”
- The budget needs to incorporate guidelines – consistently – but allow managers the opportunity to make requests that go outside the guidelines. Needless to say, the process must enable supporting rationale for the request to be clearly communicated.
- Even beyond explaining requests to go outside the guidelines, the process needs to enable managers to explain themselves. The rationale and supporting detail for any budget request must be easy to provide… and easy to access (for anyone with the proper authority).
- If this really is a business exercise… then managers themselves should be doing it. In that case, self service is a requirement. A process/system that’s easy enough for the managers to use without someone from Finance stepping in to do it for them.
THE PROCESS TAKES TOO LONG
This complaint covers both the extended calendar time it takes to finalize a budget, and also the enormous number of people hours that go into producing it. And by the way, although we’re focusing on budgeting today, forecasting usually requires at least half the effort of the original budget.
- Each year, the budget templates need to be updated with new accounts, new units, perhaps a new roll up structure as well (requiring new spreadsheet links). Making those changes across multiple spreadsheets can take days and the results are fragile.
- The budget templates also need to be updated each year with new “baseline” and/or historical information. This too can take days.
- Validating all the formulas in all the spreadsheets and roll ups are accurate is enormously time consuming. That’s why time often runs out and Finance is forced to produce a budgeted P&L that hasn’t been fully validated. It’s a “cross your fingers” moment.
- Time spent churning the budget to close the gap between the top down targets (what Sr. Execs expected) and the bottoms up budget (what department heads produced). A half dozen or more churns of the budget (a.k.a. cycles) is not uncommon.
- Time spent validating that all the right assumptions were appropriately applied, and identifying/assessing the rationale for any variance to the guideline (some are legit, some are not).
- Rework caused by a breakdown in communication between the department head and the finance person doing the budget on their behalf… leading to comments like, “That’s not my number.”
There’s more to it than that of course, but that list is daunting enough. So let’s take a look at what the requirements are to address these issues.
Requirements for Improving the Process
The limitations and challenges we outlined above are all inherent in Excel. So addressing these challenges – effectively – does mean bringing is some enabling technology. Here are some requirements though of any system you might want to consider:
- Enable the high level targets for revenue growth and expense management to be reflected in a baseline budget. Have your managers use that as their starting point and clearly identify changes to those baseline assumptions.
- To significantly cut down on the mechanics of setting up a new budget or forecast, eliminate the need to link budget templates, or write formulas to create roll up reports. This should be a hard and fast requirement of any budgeting solution.
- Input the guidelines into the system (e.g., 3% salary increase) but enable variance reporting to capture any deviation. Make it easy to separate out legitimate variances.
- Implement a system that is easy enough, intuitive enough, for line managers and department heads to do their own budgeting. Maybe you won’t get 100% percent of the managers to do their own, but even half, or 75% could make a real difference. This can eliminate a significant amount of miscommunication & misunderstanding that generates rework.
- Excel is many things, but it is not a database. Replace excel with a database. You won’t believe how much time this can save.
While this is a relatively short list of requirements on its own, it should be coupled with the requirements list above (to address the issues related to a lack of business value).
So there you have it. From a technology enabling perspective, there’s a lot that can be done to make the budget process more efficient AND more effective. Leadership of the Finance organization is also required. Starting with the type of leadership that steps up to makes things better… not just for Finance … but for the whole organization.
Your comments are welcomed and encouraged.