Why your budgeting isn’t working: top budgeting problems and solutions
Months of valuable time go into creating a company budget - consulting with colleagues, analyzing historical data, and estimating future performance.
For many organizations, budgeting is a time-consuming, manual process. What’s worse - basic budgeting and reporting can fail to surface opportunities for growth and innovation. But it doesn’t have to be this way!
A more effective budget process is automated, collaborative, and analytical. The exercise is as much about detailed analysis and intuitive projection as expenses and revenue.
What is budgeting?
Budgeting is a process that business leaders use to outline the company’s fiscal goals for an upcoming period. Through the budgeting process, management estimates revenues, expenses, and expected cash flow to create a detailed representation of how they will achieve their desired financial position.
Preparing a budget is often a once-a-year exercise that provides a fixed picture of company performance. Management can use variations between projected and actual performance to identify realignment opportunities.
However, for many organizations, the budget process can take three months or longer, which can significantly limit the insights garnered.
Why isn’t my budget working for me?
Your budget isn't working for you because it's a static process.
For example, if it takes three months to collect, compile, and analyze your budget data, the insights are already outdated by the time you circulate the final budget with the broader organization.
Another limitation to your budget could be the technology you use. Excel as a budgeting tool has several limitations, including:
- Spreadsheets aren’t made for collaboration - making it difficult for budget owners to contribute to the process.
- Spreadsheets lack documentation – leading to broken formulas, misentered amounts, and #REF! errors.
- Spreadsheets are neither a database nor reporting system – creating difficulties with complex data manipulation and report formatting.
- Spreadsheets have limited ad-hoc querying – making it challenging to find specific data points and order your data by account, department, version, project, product, or time.
How can I fix my budget?
To fix your budget, you should take a two-pronged approach that combines finance technology and an agile budget methodology.
Compared to Excel, a Financial Performance Management Platform (FPM) is well-equipped to meet the demands of agile budgeting. Sometimes referred to as FP&A software, or Corporate Performance Management (CPM) software, FPM software has several capabilities specifically for budgeting:
Spreadsheets
Time-consuming and manual collection, merging, and consolidation of data in a spreadsheet
Spend your time tracking errors, fixing formulas, and managing version control
Lack of visibility into processes and progress
FPM software
Automated data collection and analysis with the ability to adjust budgets or forecasts based on changing conditions
Spend your time on analysis and interpretation with the confidence that your data is accurate and up to date
Spend your time on analysis and interpretation with the confidence that your data is accurate and up to date
You can learn more about FPM platforms versus Excel here.
Once you have best-in-class budgeting software, you can evaluate which budgeting methodology would suit your organization.
What are the different types of budgeting methods?
Here are 6 different budgeting methods for more effective budgeting.
Continuous budgeting
Continuous budgeting involves adding a new month to the end of the budget for every month that elapses.
Why continuous budgeting works:
- Allows you to continually evaluate your budget model and revise assumptions for each incremental month.
- Eliminates the need to develop a new budget for each fiscal year.
- Empowers you to monitor short- and long-term plans and allocations and adjust behaviors accordingly.
- Reduces excessive end-of-year spending in attempt to use up budget funds.
Zero-based budgeting (ZBB)
Zero-based budgeting (ZBB) is when you start each fiscal year with a zero-base. When you create a zero-based budget, each department accounts for its needs down to the line item, regardless of whether the amount is higher or lower than the previous budget.
Why zero-based budgeting (ZBB) works:
- Superior accuracy, as budgets are more likely to be within +/- 5% of target.
- Prevents small shifts in expenses that can impact business performance.
Incremental budgeting
Incremental budgeting accounts for actual figures from the previous year and calculates the current years budget by adding or subtracting a percentage from the plan.
Why incremental budgeting works:
- Ideal for companies whose primary cost drivers don’t vary from year to year.
- Allows you to be strategic about using the extra funds, particularly if you increase your plan by a certain percentage each year.
Activity-based budgeting
Activity-based budgeting is a top-down approach that allows a company’s strategic plans to influence the budget by calculating the financing need to support a target or output goal.
Why activity-based budgeting works:
- Aligns your budget with your company’s strategic initiatives.
- An activity-based approach can accelerate growth by prioritizing long-term goals.
Value proposition budgeting
Value proposition budgeting ensures that every cost listed in the budget adds value to the company, asking questions such as: Why is this amount used? Who does it create value for – customers, staff, or stakeholders? Does its value outweigh its cost? If not, is it justified?
Why value proposition budgeting works:
- Eliminates unnecessary expenditures.
- Can increase a company’s return on investment.
Strategic budgeting
Strategic budgeting accounts for long-term objectives and costs. The process includes preparing various budgets and forecasts for short-term expenses that align with a long-term goal.
Why strategic budgeting works:
- Allows you to allocate specific funds to various activities.
- Gives you a long-term strategic plan broken down into single-year objectives.
- Applies financial values to your planned activities so you can evaluate their value.
How do I choose the best budget method for my business?
There are several budget methods to choose from. Each method has its own advantages and suits different organizational needs.
We recommend choosing the budget method that best aligns with your organization’s current goals, and then revaluating at regular intervals to identify opportunities for alignment and improvement.
Budgeting: A Two-Pronged Approach
Traditional budgeting is an outdated and time-consuming process. It often involves using Excel, which has limitations, including limited collaboration and documentation and an inability to automate processes and quickly analyze data.
To fix your approach to budgeting, we recommend leveraging finance technology, like an FPM platform or software, and combining that with an agile budgeting methodology. This allows for more collaboration, better decision-making, and improved financial management.
Improve collaboration and automate your workflow process during your budgeting cycles.
Ultimately, agile budgeting is all about finding the right tools and approaches to make budgeting a more effective process.
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