SmartAdvice: How To Turn The Budget Process Into A Value-Add
Here are some tips to make the annual budget process pay off year-round, The Advisory Council says. Also, a practical approach to quantifying software quality and tips on how to deal with a letter requesting you preserve information for a criminal investigation.
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Topic A: How can we turn our annual budget nightmare into a process that delivers value to my organization?
Our advice: While the new year is here, for many, the New Year's budget still isn't done. Or, if it is, it was yet another in a seemingly endless cycle of budget revisions, useful only to the corporate finance department. Still, there is a way to make the process benefit your individual profit-and-loss centers.
Begin by looking at the process as having three distinct stages: Crafting, Monitoring, and Forecasting. Crafting is the foundation. When a budget is well-crafted, the effort is repaid in the subsequent stages.
This is the stage with which most are familiar. It begins with a directive from executive management, accompanied by vague guidelines, after which we cobble together our numbers, submit them, and either never hear another word, or have them rejected out of hand with little guidance for revision.
To get value from this stage, we suggest the following:
Begin with the guidelines from executive management, vague as they may be.
Set up the central budget database in a system separate from the organization's main financial system. This gives you the ability to go through multiple iterations, reports, submissions, uploads, and downloads without affecting the day-to-day main system. Only when the budget is final should numbers be populated in the main system.
Provide operating managers with a spreadsheet pre-filled with actual year-to-date (YTD) numbers, comparisons with the current year's budget (YTD and full-year), forecasts for the balance of the current year, and YTD and forecast variances.
Submit the budget for review by providing a "load budget" button on the spreadsheet, which connects to a central budget database and transfers seamlessly all new information.
In the budget system, provide reviewers with the ability to make changes, comment on those changes, and return them to managers to act upon.
Enable managers to pull down budget reports on their own schedules.
This stage is familiar to most operating managers. Managers receive periodic reports in which actual period and YTD expenditures are compared to budget and, sometimes, to prior-year data. Typically, this information is "pushed" at managers via hard copy.
Additional value comes from making this data available through on-demand reporting and extraction tools. Value is derived from giving managers more flexibility to access and work with this critical information, such as the ability to load their information into their own spreadsheets. Tools with drill-down capability also help, especially to investigate variances.
The annual budget, once finalized and approved, becomes "Forecast No. 1" for the new fiscal year. In most organizations, this is the last time it's reviewed.
The budget's greatest value, from a management perspective, is the ability it gives you to forecast your profit center's business through the year. Business conditions change, yet the budget often doesn't. Using the same processes outlined above, managers should create forecasts as needed to reflect the changed business climate. When this is done, the annual budget cycle becomes a "perpetual" or "rolling" budget cycle. It becomes a close-to-real-time analysis tool.
A final benefit with large potential is that once managers become accustomed to this process, the following year's budget cycle becomes just another forecast.
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