Every company prepares a budget and every single one of them struggle with their budgets because of ineffective budgets practices. This is the very reason why many critics of budgeting label it as a futile exercise designed to waste the time of managers and designed to discourage these very same managers to take risks.
Reduced value of budgets, imposition of centralized decision making, and tendency to make people undervalued are just 3 of the many criticisms of budgets in practice today.
How can ineffective budgets be improved?
The first step in improving budgets is to recognize that you have an ineffective one. One that is inflexible, irrelevant, and too easy to manipulate to suit vested interests.
We have laid down 5 Library tips on how you can fix an ineffective Budget:
- Expectation Setting
Before beginning the budget process, start with small sessions where the team seeks to answer relevant questions that point towards the goal of appropriate allocation of resources. A template must be used in order to standardize discussions in terms of required resources and expected results across various business units.
In these discussions, establish clear rules such as backing of projections with facts and providing details for key assumptions. Make sure that these discussions while structured in nature will also provide an avenue for an open dialogue between each other.
- Business unit case building
If you start your budget process with internal considerations that only rarely touch on market demand, this practice contributes to production of ineffective budgets. Therefore, a helpful practice is to build a business case for each business unit that springs from market demand and then working backward into internal costs and other capacity measures.
With this practice, you make sure that there are realistic projections for growth and profitability. It is important to have these things ready before the start of the actual budgeting process and budgeting discussions.
- Allocate based on Top drivers
In many companies, budgets are spread evenly across all of the business units. However, this is not a very effective way to do budgets. Instead, business units that are the top drivers of profits and growth should be fully funded before looking into the others in the list. Business units that are at the very bottom of the list will have to do with what remains of the budget.
Following this practice, it is important to explain to everyone involved what resources were allocated to each unit and the reason for doing so. This way, there is understanding and setting of performance expectations moving forward as well as an understanding in all business units that performance affects future resource allocations.
- Non-use of Budgets as Performance Evaluators
Using budget as a performance evaluator really only benefits those that are dominant and manipulative. This has been proven in many companies that use budgets as a performance evaluator.
A good practice is to make sure that managers are evaluated on the basis of the performance of their business unit based on conditions faced in a given period. This can be done either by comparing it against similarly situated business unit or through historical performance with economic conditions and interest rates, etc. taken into consideration.
- KPIs use together with Financial Results
It is a mistake to rely solely on financial results when evaluating business units as well as managers. It is therefore a good practice to use performance metrics like customer satisfaction, production improvements, new business acquisitions etc.
CPM Tool Adoption
Today the adoption of Corporate Performance Management solutions to aid in streamlining and automating budgets is not anymore a want but a needed investment for all finance departments. Every second wasted on mundane tasks by the finance personnel is an opportunity lost for the business.
CPM tools like Performance Canvas by DSPanel offers a solution that enforces best practices in budgeting, reporting, forecasting, and consolidation. On top of that it also offers enhanced metrics management, automated and predictive A/R, A/P, and profitability analysis.
CPM tools like Performance Canvas by DSPanel can surely take the budgeting process of your finance department to a whole new level. Email firstname.lastname@example.org to see a live online demo or visit www.performancecanvas.com for more information.
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