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Grow Your Business Finances

Understanding Budgeting: Spreadsheets and Beyond

While most large companies have already liberated their budgeting process from spreadsheets, many small and medium-sized businesses still manage the difficult and error-prone process of budgeting on these same challenging spreadsheets. There are many problems associated with spreadsheet-based budgeting as well as many advantages to new technologies designed to automate the process and ensure greater accuracy. SMBs should plan their transition to a budgeting solution that delivers more collaboration but with more control, accountability and budget compliance.

Warning Signs That Your Budget Process Has Outgrown the Spreadsheet

There comes a point when a company's reliance on spreadsheets for budgeting becomes an impediment to effective decision-making and analysis. There are several clues to detect this transition point before it leads to severely ineffective decision-making , lost productivity and lost opportunities.

  • No single version of the truth guides or emerges from the budgeting process.
  • Ownership and accountability by business users have disappeared and control over consolidating the budget has been concentrated to a single person.
  • Executives can't answer the following questions:
    • Who are my most profitable customers?
    • What managers are the most productive?
    • What product line is most profitable?
    • Why are certain metrics "out of sync"?
  • Financial statements are not fully integrated because it is too time-consuming to set up or the model was modified too many times to ensure no errors.
  • Detail becomes impractical and almost unattainable. Spreadsheets grow so large that budgeting for some line item expenses or revenue items is done only at a consolidated summary level.
  • Budget calculations become too complex for most budget preparers to follow and the model gets too large for users to assimilate.
  • It takes more time to manage and maintain the spreadsheet than to perform the actual analysis and planning.
  • The budgeting models break frequently with changes to data structure or roll-ups.
  • There are data integrity issues — mistyped data, broken formulas, missing links, logic errors — that make budget models unreliable.
  • Comparing current year actual results to plan and/or last year's actual results is a manual, cut-and-paste exercise that takes too much time, invites errors and slows down month-end analysis and reporting. Summary or high-level variance analysis lacks underlying detail.
  • It's difficult to accurately track payroll , taxes and benefits expenditures for all employees, including contract, part-time, and seasonal workers, resulting in over- budgeting for payroll taxes such as FICA or underestimating total employee costs impacting year-end cash flow.
  • Deferred revenue projections (for projects, maintenance contracts, royalties, renewals, subscriptions, etc.) are too complex to model, requiring the layering of multiple revenue schedules within multiple periods to create the waterfall effect.

 

Benefits of Budgeting with a Packaged Application

An attractive solution for replacing the spreadsheet is the use of innovative technology solutions designed to automate the budgeting process, allowing your financial leaders the freedom to focus on more strategic initiatives and feel confident in the financial future of their organization. Key benefits include:

  • Greater accuracy — Formulas for your models are based upon your assumptions and workflow, utilizing built-in financial intelligence and business rules to ensure complete accuracy.
  • Centralized database — Any changes to estimates or assumptions are automatically updated in real time so everyone is working with a single version of the truth.
  • An easier-to-use common interface — Applications are built from the business perspective to maintain consistency with business entity names rather than database conventions.
  • Accounting application integration — Automated processes will import data from commonly used accounting applications, with the ability to support a rolled-up budget and forecast from multiple systems. This expedites data transfer and minimizes errors.
  • Reduced programming — Eliminate the need for spreadsheet-type formulas, and therefore errors, your budget and forecasting model become an accurate reflection of your business.
  • Contingency planning and sensitivity analysis with "What if" scenario generation — Users can change variables to see their immediate effect on outcomes. A series of models can be replicated, enabling additional analysis and comparisons.
  • Integrated reporting — Generate profit/loss, balance sheet and cash flow statements automatically and can be customized to your needs.
  • Collaboration — Involvement and collaboration by more end users and contributors to the budget process.

First Steps Toward Enterprise Budgeting

A best-practice approach to moving beyond spreadsheet-based budgeting would start with these steps:

  • Fully understand your current budgeting model. It's likely to contain embedded assumptions, formulas, reporting requirements and experience that are important to transfer over to a packaged application.
  • Determine what works and what does not work in your current process. For example, if your particular business model requires the bottom-up forecasting of many participants, you need a packaged application with strong collaborative features.
  • Create the vision. Project the ideal vision of your budgeting process, including who would participate, what integration would be helpful, which general ledger or other transactional systems your budget should link to and the reporting needed.
  • Conduct user analysis. What kinds of users today take part in your budgeting process, who is missing and who are the people you want to draw in? By documenting their needs, you can set the stage for a good level of user acceptance of the budgeting application.
  • Secure high-level executive sponsorship and ensure that you will have sufficient project justification and funding.

The primary benefit of graduating from pure spreadsheet budgeting to an automated process based on innovative technology solutions is a more accurate, inclusive and timely budget with significantly reduced cycle time. Companies often report that they can move from annual budgeting to quarterly budgeting as a result. Faster, more informed budget-related decisions can also be enabled. For the SMB, the ability to assess profitability by product line, customer, region and channel in real time helps determine where to put resources, cash, and personnel. The enterprise budget gives a complete view of your financial organization, blending top-down and bottom-up perspectives, and incorporates historical and forward- looking information to empower your financial leaders to feel confident in the financial future of your organization.

The views expressed are those of the author and do not necessarily reflect the views of the publisher.

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