Budgeting to Strategy - XLerant

Budgeting to Strategy AND Making Budgeting Strategic to the Organization

Two distinct but related questions:

Do you budget to strategy, or do you budget to history and politics?
Is budgeting a strategic function in your organization, or is it a mechanical one?

In many organizations, the days of putting numbers on a spreadsheet and calling it a budget are over. Many organizations, but not all. Some still believe that budgeting is a mechanical exercise rather than a strategic process – and these organizations still budget to history or politics. They are missing the valuable opportunity to treat the budget as a strategic process… and the ability to then use that budget to actively support the organization’s strategy.

Most organizations have a strategy or vision for what they want to accomplish over the foreseeable time horizon. But the budget process is still disconnected from the strategy in most organizations. This disconnect is terrible and unnecessary.

The first thing to consider is the role of the budget. The primary role of the budget is to maximize and prioritize the organization’s critical resources and to show how the organization will execute on their strategy over the next fiscal year. This is a simple concept, but lost on many organizations today. Ownership and participation are required in order to achieve this central objective. To this end, the best thinking comes from the departmental heads who make up the organization. Additionally, this approach requires that the financial team (and the CFO) treat the budget process as “mission critical” and strategic – not a mechanical exercise in putting numbers on a two-dimensional spreadsheet. Without these two basic underlying principles, the organization is doomed to a very poor budget process, poor financial performance, and an inability to budget to strategy. Therefore, such organizations budget to history or politics rather than the intended process of budgeting to strategy.

So, how do you accomplish these two principles? The first step is having the organization get serious about financial planning and get out of the 20th-century mindset on budgeting. This is going to require a more serious budget process and probably require some process change. If your organization is not up for that, please stop reading this. Fact: You cannot seriously budget in a two-dimensional spreadsheet that does not have inherent budget intelligence, is not a serious software development environment, is not a database, and requires manual effort to run and maintain. You just can’t. Your senior financial management must be open to consider a serious upgrade to the budget process and open to process improvement (change). However, these folks have never seen a serious approach to budgeting so they are likely to be skeptical (and rightly so). They view budgeting as a necessary evil and a mechanical financial process rather than a strategic one. But if budgeting is simply a financial process, why are 80% to 95% of your users non-financial people? Budgeting is as much a communications process as it is a financial one. And the goal is to communicate how the organization will support and fund the organizational strategy.

This may require some selling on your part. Not product selling, but concept selling. Management must believe that this process change will lead to serious improvements in the organization’s performance, or they will never fund this effort. You are going to need to find a creative way to get management’s attention and/or the attention of your CFO in order to be successful.

The second thing to consider is how to better involve the users… or department heads. These people classically hate the budget process. Why? Because, historically, it has been a manual, cumbersome and ineffective process of putting numbers on a spreadsheet or simply taking last year’s numbers and using them. Getting greater user participation in, and ownership of, the numbers is the key. People need to understand the deep cultural shift in budgeting to organizational strategy rather than to history and politics. This requires a guided interface that appeals to the non-financial and non-Excel people, user flexibility to allow them to budget their departments the way they think about their departments, and the right functionality to help them justify their budget in accordance with the strategy of the organization. So, the three critical requirements are purpose-built budget intelligence, an elegant and understandable user experience and freedom and flexibility to budget the way they need to (under some confines of financial control, but not at the expense of user flexibility. Strike a balance).

This goes beyond users to the main constituents in the budget process… users, finance, management and IT. Or, simply stated: we all want what we want.

Users want the ability to easily add notes, annotation and justification anywhere on the budget. They want to be able to insert supporting detail free-form to show what a number is made of. They want the ability to propose their own unique (by department) initiatives that impact multiple accounts. They want to have situational budgeting functionality that offers them choices for how to budget certain accounts different ways. They want the ability to request equipment easily and not have to worry about cost accounting methodologies. Many want detailed headcount planning for salaries, increases, benefits, and incentive compensation. They want to be able to simply deal with new hire policies, federal and state tax calculations, and allocation across departments. They want their managers to be easily able to see and approve plans (or just as easily not approve them, along with their rationale for denying approval), they want structured and simple, but powerful, “what-if” functionality that does not require a masters in computer science to operate, and they want the ability to marry actual results with budgets to do revised forecasts as the fiscal year unfolds. Users want the ability to simply create monthly versions of the annual budget that will reflect the reality of different accounts by month. And they require simple but powerful built-in reports to facilitate the budget preparation, analysis and approval process with no re-keying of data.

Financial professionals want a structured application that already understands the budget process, is a database application (so that there is no manual management of data and spreadsheets) and requires no re-keying of information. They want to eliminate the possibility of data and formula errors. They want powerful calculation, consolidation and reporting functionality that simplifies the budget process, allowing them more time for analysis. They want a simple but powerful bi-directional interface to existing transactional systems like general ledgers, personnel, and fixed asset systems, without requiring IT support.

Management wants to make sure that budgets are error-free, that they have been approved up the chain, that they can get quick answers to questions about the budget, that they have access to notes and justification for the numbers, and that proposals for new initiatives would help the organization achieve the desired strategic results. They want creativity in a process that has historically lacked any creativity whatsoever.

IT wants an environment that requires no or little support. They want a process that is safe, secure and meets their system requirements. They probably want a cloud-computing environment.

How does everybody get what they want?

The best way to budget to strategy and make budgeting a strategic application in your organization is to consider a cloud-based, packaged application, with a guided interface that properly blends user flexibility with financial controls, without sacrificing either. The system should have a powerful, yet simple way to integrate with transaction systems and should be simple for finance to maintain. It will, most likely, require both process change (read: improvement) and a minor investment.

So, to get to a point of budgeting to strategy requires some sophisticated capabilities that simply do not exist in Excel and can’t and should not be programmed into Excel. Budgeting to strategy requires and deserves a purpose-built application software product that anticipates the needs of an organization and is proven to work in that industry segment. In today’s world, cloud-based computing (a program that runs over the Internet with only the need for a browser) is the way to go. This requires no hardware or software to install or maintain. While this will require a modest investment, the pay-off in terms of eliminating errors, enticing department heads to have more participation in and ownership of the budget, getting a more meaningful budget, and making sure that the organization’s strategic initiatives are properly supported and funded greatly outweighs (by orders of magnitude) any small expenditure required to handle this “mission critical” application. And, implementation and training can and should be able to be accomplished in six to eight weeks total with little effort and little on-going support from the finance team.

You will be rewarded if you have the determination and confidence to make this happen. Here’s a quick checklist to make sure you are prepared to budget to your organization’s strategy with a strategic budgeting process:

  • The CFO must treat the budget process as “mission critical”
  • Senior management must be open to process change
  • The budgeting process must be viewed as a communication process – with the ultimate goal to communicate how the organization will support and fund the organizational strategy
  • This process change requires ownership and participation and the best thinking of the department heads / budget managers
  • Management must believe that this process change will lead to serious improvements in the organization’s financial performance
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