Budget season has arrived and it’s time for CFOs to do the impossible: create a budget plan that will hold up in face of the constant flux and uncertainty in the market. For many, budgeting feels like an exercise in futility, one that has little relation to the manner in which the coming year will unfold.
It is doubtable that these sentiments stem from an old, archaic way of thinking about the budgeting process and its capabilities. In a recent survey conducted, we found that some 80% of mid-size businesses still rely on spreadsheets to build their budgets, which is why budget myths abound. It’s time to debunk them.
What if scenario planning is impossible
Here’s a familiar scenario: it’s 5:00 in the afternoon and the CEO calls to ask what would happen if the company divested itself of a division. How would such a divestiture affect profitability and are there any hidden surprises that may come back to bite the company’s balance sheet 12 or 18 months from now.
What if scenario planning is one of the biggest headaches of the budgeting season for companies that wait until the last minute to update, approve and consolidate their spreadsheets. Testing these kinds of theories are achievable and simplified when the right tools are put in place. In our example, discovering the consequences of divesting a division would simply be a matter of filtering the division of the model a fond running the financial reports to see its impact on profitability and cash flow. From there, you can even filter only on the division to see it’s gross impact to income and cash flow.
Budgets aren’t useful for managing the business
Many companies believe that budgets aren’t very valuable tools for managing the business on an ongoing basis. Budgets are seen as an exercise in set-it-and-forget-it. This is a shame, because a budget is the basis for a company’s plan or vision for the year ahead, and it’s a valuable tool for assessing performance month to month, or even week to week.
When finance teams maintain rolling forecasts throughout the year, they set themselves up for success. A rolling forecast will process all inputs according to a company’s business structure and update all outputs, such as P&L, balance sheet or cash flow statement.
Furthermore, having access to accurate, forward-looking balance sheets and cash flow statements that are synchronised to the underlying budget will allow companies to make informed decisions, set financial goals for the year ahead and increase business growth. They are also critical features for tracking performance and identifying any issues that might affect a company’s set plan.
No one should have confidence in the budget numbers
A common myth is that financial teams can’t really have confidence in the numbers coming out of their budgets because it’s too difficult to get all of the inputs right.
This could be case with spreadsheet-based budgets, since Excel programming doesn’t enforce the accurate flow of transactions throughout the models. In fact, users can define the formulas and flow as they please, which means they can inadvertently program them so that they violate your business structure or even established accounting standards.
With the advancements made to financial software today, there is no reason that these mistakes are being made when they are easily preventable. With enforced parameters and established business rules, all data output will be accurate and automatic. When budget line items follow these parameters, you can have a great deal of confidence in your budget.
Planning isn’t collaborative
Budgeting and planning should be collaborative, but for many companies, it is siloed. Excel wasn’t designed as a collaborative tool, and if you rely on it to build and manage your budget, you will spend a great deal of time reconciling multiple sheets.
The goal of a collaborative planning tool is to allow each contributor — IT, marketing, operations, sales, etc. — to enter relevant financial information and transactional data, and have those inputs ripple through the budget automatically.
Cloud-based tools, for example, will do this quite well because they’re built around a centralised relational database, so everyone sees the same financial data, or whichever portion of the data they need to see.
Planning is great, but it never identifies the unknown exposures
A goal of the budgeting process is to eliminate any cash flow or balance sheet surprises that can crop up during the year. Knowing the timing, amount and predictability of future cash flows is critical for assessing the current health of your company, as well as for making key decisions.
Unpleasant surprises can be avoided with forward-looking balance sheet and cash flow statements that are synchronised to the underlying budget and linked to the GL. Such a set up will allow you to forecast cash requirements as you create your budget, as well as drill down into the underlying data so you can understand risks, variances and opportunities, and initiate faster changes to meet the anticipated cash needs well ahead of time.
Finance teams have lived with tough constraints for so long that they’ve come to accept them as facts of life. But these are myths, imposed by outdated tools. Fortunately, corporate finance has caught up to the 21st century, and you can now enjoy the same efficiency as every other department in your organisation.