Budgeting is one of the most fundamental business processes. However, there have been controversial views regarding to the true value of budgeting, or what it actually brings to companies in terms of ROI. Some people say that the process can be skipped, some say it plays a considerable role, while others remain sceptical about an objective way to measure the ROI of budgeting.
Corporate budgeting is essentially a financial exercise by finance executives to produce a list of all planned expenses and revenues. The traditional method for doing this is using spreadsheets. A budget, usually compiled every fiscal year, is expected to serve these purposes:
If executed efficiently, budgeting can be hugely beneficial to enterprises to boost corporate performance management. Nonetheless, in reality, shortcomings associated with either the accounting tasks of budgeting, or how it is traditionally approached can undermine the true value of the process.
Let us focus on the reasons why a lot of managers remain sceptical about spending time and money on creating a budget.
Read more: How has Dana-Farber shortened their budget cycle by 40 per cent?
Firstly, budgeting is often tied to pure cost management. Therefore, the expected words are “cuts” and “do more with less”. However, this rigid, inflexible approach could well result in false expectations of savings or productivity gains, and even poor allocation of resources. If budgeting is only based on last year’s numbers, decision makers may be missing out on investment opportunities available this year and allocate inefficient funding accordingly.
Secondly, traditional budgeting processes facilitate unnecessary micro-management. This is not only detrimental to performance of managers, but also to the organisation’s. Peripheral decisions such as how much to spend on traveling, training, consulting should not be left for top executives. Individual managers who know best should be given the power to decide how to lead their group without arbitrary expense restraints, providing they can deliver results at reasonable costs.
Thirdly, there is a lack of strategic alignment when it comes to budgeting. The process is treated as a separate entity from the other core business functions. Moreover, budgeting is also executed independently by different departments, resulting in a lack of enterprise-wide coordination.
Read more: The role of budgeting in corporate performance management
In order to restore the true power of budgeting, making it less of a calendar-driven process. There should be a closer connection with financial planning and forecasting. Better coordination and strategic alignment can boost resources allocation since top executives and managers can see if their decisions are to tread on others’ planning and so on.
Budgeting also becomes less cost-driven and more investment-based. Departments submit their budgets containing the full costs of their products and services to the whole enterprise. Then, decision makers, having an overview of all proposals, can scrutinise, approve or reject these plans based on ROI.
Please read the next blog to find out more about the investment-based approach towards budgeting.