Adapt
or die – this is as true in business as it is in life. If you keep doing things
the same way ignoring the change all around you, others will overtake you and
you will be left with nothing to sustain you. Budgeting is no different. If you
remain stuck in the old way of doing things, your business will continue to
lose money, waste valuable resources and work from old unreliable information
that is largely ignored by those who truly manage your company.
A long time ago and far away, businesses
operated using ‘top-down budgeting’
- the finance department had to put together an overall budget for the business
with strategic input from the FD, which was then broken down into each cost
centre and presented to the cost centre managers as a done deal.
Since businesses are greater than the sum
of their parts, randomly assigned budgets built from historical information
cannot direct or reflect the financial performance of cost centres with any realism.
As a result, top-down efforts are largely ignored by cost centre managers, and
the business loses the benefits of a budget that accurately reflects their
business needs.
Recognising the importance of the budget
and having the input of cost centre managers has been a huge step in the right
direction for budgeting as a whole and has resulted in ‘bottom-up budgeting’.
This is a collective process that involves
cost centre managers providing current individual financial information
relevant to their own cost centres. The proven outcome is a more accurate and
credible budget, representing a unique expectation for every cost centre,
created by an operationally involved manager.
It empowers those in charge of their
domains with the tools to set expectations for themselves, that will be
critically examined by the financial department and used to hold managers
accountable for their performance. With responsibility comes a sense of
ownership, leading to accountability, more accurate budgets and good spending
practices.
The
catch however
is that although many companies recognise the value of this approach, their
execution often falls short. Businesses still tend to compile budgets using
central spreadsheet templates distributed to the cost centres for completion,
falling straight back into the seemingly endless cycle of amendments and
approvals.
This can quickly create a time and
opportunity cost of hundreds of billable hours of operational as well as
financial staff, and more often than not and uses a format that alienates
non-financial operational managers.
While this version of bottom-up budgeting
is at least more accurate than the top-down method, it is hugely wasteful,
especially when the organisation has more than just a few cost centres.
The only solution is the final evolution to real-time, online
systems that are easy to implement, use and understand by financial and
non-financial managers. These systems will support bottom-up budgeting by
allowing cost centre managers to input current relevant information into
familiar uncomplicated spreadsheets that are available immediately to financial
managers; cutting budgeting cycles to three weeks or less and therefore saving
valuable resources and money.
In
the end, recognising the need to adapt is the
first step and then you just need to keep on evolving. Bottom-up budgeting
completed with the correct tools results in greater financial empowerment,
engagement and knowledge throughout the business. The resulting sense of
ownership leads to greater sharing of responsibility and accountability within
business domains, allowing their performance to be driven by their own
expectations.
The
results are not just more efficient and effective budgets, but just as
importantly, better use of company resources. Freeing up business managers to
run the business and the finance department to strategically guide the
company’s performance can only result in a smarter, more upwardly mobile
business. Adapting will not only mean your company will live, it will mean it
will thrive and grow.
Thanks
ReplyDelete