We all make mistakes, right? But there are little mistakes and big mistakes and personal mistakes and business mistakes. A big mistake made in a business setting can have profound implications – both on you personally and on your organization.
Budgeting is gaining significant importance as organizations try to improve and better tune their financial performance. Providing for a well-thought out and justified plan – that ties to the strategy of the organization and is owned by the department managers – is the key goal that most institutions are trying to achieve.
How to achieve these goals and how to avoid the mistakes that impede these goals is critical to the process. There are 10 fundamental mistakes that people and organizations can make around the budget process that will hurt or eliminate their chances of success. These mistakes are, unfortunately, common and are sometimes in the blind spot of the very people in the organization responsible for the budget function.
Here is a list of the key mistakes and ways to prevent making them.
Mistake #1: Failing to consider budgeting as “mission critical” to the organization. In today’s world, creating a budget that is well-justified and supports the strategic plan is not a nice to have…it is a must have. Organizations that do not treat budgeting and planning as a “mission critical” application are doomed to live with a poor plan, fraught with problems and not well-supported by the department managers whose input and participation is required. Budgeting and financial planning is as critical to the organization as the general ledger and must be treated as such.
Mistake #2: Trying to use Excel for budgeting. Excel is not a system development environment, nor a database. It is usually used for budgeting as a “default” – since ERP systems are notoriously bad at budgeting. So financial professionals took matters into their own hands and tried to use discreet Excel worksheets for budgeting. Using Excel results in a lack of user flexibility, the re-keying of data, the possibility (more likely the probability) of errors, and manual data management. An additional mistake in trying to use Excel for budgeting is assuming that the department heads are comfortable using Excel, or an Excel look-alike product. The reality is that many department heads are non-financial people and would prefer a more intuitive user experience. But there is a role for Excel as a calculator and a lens into the database, but it should not be the primary budgeting system. The role for Excel in the budgeting process needs to be a well-thought out plan and a bi-directional link between Excel and a purpose-built budget system.
Mistake #3: A focus on functionality over user experience in budgeting software. This is best explained by a recent quote from the CIO Journal of the WSJ,
At a time when people are accustomed to using well-designed applications from companies such as Google Inc. and Apple Inc. in their personal lives, they have little patience for workplace applications that leave them confused. Functionality is no longer the definition of success. Usability is key. Users will accept less crap today.
If you want user participation, you MUST focus on the end-user experience over attractive “bell and whistle” functions that will rarely, if ever, be used.
Mistake #4: Treating all users and departments alike. Different people think about their departments differently. Providing a one size fits all budget preparation environment simply does not accommodate the diverse needs of your different users and departments. Flexibility at the user level is required for effective budgeting.
Mistake #5: Viewing the budget process as a financial versus a communications process. While the end goal of the budget is to collect and produce a financial plan for the organization, the main exercise is a communication process of determining how the various department leads plan to support the organization’s strategy (and fund that strategy with resources) over the next fiscal year. This is a communications process that needs to be supported with outstanding communications capabilities. Lack of documentation, justification, notes, audit trails, approval and budget workflow can seriously impede this communication flow.
Mistake #6: Issuing an archaic RFP process for a new system. The worst way to select a product where 90% or 95% of your users are non-financial people is to issue an RFP. There are two fundamental reasons why RFP’s are becoming archaic. First, RFP’s are written to support an existing process without regard to what might be new and different in the marketplace. Secondly, RFP’s simply cannot capture the most important capability of the budgeting system…usability. A checklist of features developed without regard to the usability of the system is a complete waste of time. It is a process that died at the end of the last century.
Mistake #7: Incorporating budgeting into the ERP system. The goal of the ERP system is one-stop shopping. Yes, ERP systems are good at transaction processing for financial people – but budgeting is an account balance application for non-financial people. So selecting a best-of-breed solution for this particular “mission critical” application is more important than having a budget (and a very poor user experience with limited functionality) that is, in theory, integrated into the ERP system. In today’s world of software, anything can integrate with anything else seamlessly. Plus, with cloud-based budgeting, the need for IT cost and support is eliminated and the usability of the software is dramatically improved.
Mistake #8: Choosing slice and dice functionality over budget preparation usability. Many organizations make the classic mistake of choosing variance reporting over budgeting functionality and usability. They immediately get sold on slicing and dicing of information and forget that the quality of that information is more valuable than the viewing of that information. Remember GIGO…Garbage In, Garbage Out.
Mistake #9: Losing the forest for the trees. Many organizations, in the evaluation process for budgeting, will list a whole series of problems that they are trying to solve. Yet in the end, they will focus on one singular feature that may not work precisely the way they want it to. Therefore, they will throw out the entire evaluation and lose site of the 99% improvement that they could get for one single thing that may be imperfect. This is called Perfection Paralysis. The acronym to apply here is to KISS.
Mistake #10: Budgeting as a once-a-year exercise. Getting one version of a budget is challenging enough for many organizations. Repeating that process quarterly is a painful thought. But if the process is easy, then the concept certainly makes sense. Actual results will vary. Having a fresh view of the financial plan can be immensely powerful versus relying on a plan that was produced 15 months prior to the end of the fiscal year. This means having the ability to marry actuals from the ERP system, as they become available, with the budget or revised forecasts and making further adjustments to the plan to keep it fresh. Keeping the process “fresh” also improves the quality, reliability and the ownership of the plan by the department managers.
Eliminating or preventing these 10 mistakes can improve financial performance, improve the department heads participation in (and ownership of) the numbers, allow the organization to better budget to the strategic plan – and make life easier for the CEO, CFO, finance department and the department heads. Confidence in the numbers and confidence that the plan ties to strategy can, in itself, justify the investment to improve the process.