Face of Budgeting - XLerant

Changing the face of budgeting

I hate the word paradigm, don’t you? It’s been so over used, it hardly seems to have any real meaning left. But in fact it does have meaning — “A framework of understanding; a mindset based on a set of precepts.”

The paradigm (don’t cringe) most of us have when it comes to corporate budgeting is Excel. Or more precisely, Spreadsheet Templates. Excel has always been used as a modeling tool, as a financial tool, so it’s a natural choice. And it certainly makes a better choice than budgeting, say, in Microsoft Word.

I’m not going to argue whether Excel is the best tool for budgeting or not. The purpose of this post is to reflect on how it’s shaped our thinking about budgeting – and how spreadsheet templates have actually defined how budgeting is done.

Let’s review five basics about Excel, and then we’ll see how those basics have framed in the entire budget process:

  1. Excel is a financial modeling application.

  2. The basic interface is a grid of Columns and Rows.

  3. Numbers are either entered or calculated by formulas.

  4. Users can “break” spreadsheets by overwriting formulas or inserting/deleting rows and columns.

  5. Locking down spreadsheets is the only way to prevent broken spreadsheets.

So given those basics, here’s the framework – the paradigm – by which Finance professionals approach the budget process.

Finance needs to create a model. It might be simple – just a column for prior year spending and empty cells for next year’s budget. Or it might be complex – multiple drivers and nested what-if statements that produce a budget or forecast.

Finance needs to lock that model down. To avoid the catastrophe of numbers not adding up correctly, Finance needs lock down the spreadsheet so only certain cells can be entered.

Finance owns that model. Well, of course. They wrote it, they own it.

Users need to be trained on that model and told what to do. Once again, that’s a fairly obvious statement, but it’s got some serious implications.

Let’s look at one relatively simple example to highlight some of these points. We’ll examine how two finance departments in two separate companies might want to model Travel Expenses. I could have picked something far more complex (like Revenue planning) but the point can be made with a simple illustration. Let’s assume that in both companies the category known as Travel Expense is made up of four accounts: Air Travel, Hotel, Ground Transportation, and Meals.

Company A Finance Department: They take a simple approach. The model lists each account a row, and the prior year spending in the first column. The budget holder enters his or her budget in the next column. The spreadsheet is locked down so they can’t mess anything up.

Company B Finance Department: They take a more elaborate approach, although like Company A they lock down the template so users can’t overwrite formulas or break links. The model is based on drivers, in this case the number of trips expected each year. The template has been refined over time, so users are asked to input the number of trips to one of a dozen geographic areas, the number of people going, date of travel, calendar duration, and even the level of person traveling. The model then crates a projection for Air Travel, Hotel, Ground Transportation, and Meals.

Even though these two approaches seem — on the surface — to be wildly different, they have a lot in common.

  • Finance (not the user) has decided how the accounts will be budgeted, what approach will be used.

  • The template is locked down. As a result, there’s very little flexibility.

  • If users want another way to develop a budget, they need to go offline, do their work, and keypunch the results back in the model. Visibility and control have been lost, along with ready access to the justification and rationale supporting the budget.

  • End users need to be trained in the specifics of how the model works.

  • The more elaborate the model, the greater the potential frustration of Budget Holders. There are increased training requirements, of course. But consider the person who doesn’t understand or buy into the model. They’ll go offline to develop the budget the way they want to. Then when presented with the model, they’ll need to puzzle out the right assumptions they need to input into the template to get to their desired budget results. That’s a recipe for frustration.

The point of all this is the tool has framed the process. Spreadsheet Templates have defined the framework for budget creation itself. It’s shaped the way that you think about budgeting, and the whole process by which a budget or forecast gets created. And it’s shaped it so much that you’ve stopped asking “Why are we doing this?” You’ve stopped looking for a better way. Your time and your talent has gone into perfecting the model, coming up with a better template.

It’s time for a change of mindset.

It’s not about the model — it’s about people. It’s not a matter of coming up with new or better drivers; it’s about engaging line managers in the process. It’s not about Finance keeping control of the model; it’s about budget holders owning the results. It’s about getting willing participants in the process.

I can hear some of you saying, “Even if I do buy into all that, so what, what’s the alternative?”

This is where the change of mindset comes in – and a new vision. Think about Intuit’s TurboTax for a minute. Our friends at Intuit took an inherently complex financial process… that people hate… and made it look easy.

That’s what you need to do.

The good news is that the people who develop budgeting and planning software get that vision. Or at least some do, and those are the ones who will change the face of budgeting.


Read More