Introduction
The traditional methods that have been used for budgeting and forecasting by most organisations over time are no longer useful in today’s business environment because they are generally considered to be very costly, too long and fail to accommodate the changing nature of the organisation and the business environment at large. Various scholars have highlighted the importance of budgeting and have argued that it helps improve the performance of an organisation (Lublin and Mattioli, par 2). Today’s volatile business environment has however made the budgeting process more difficult as business conditions keep changing requiring the organisation to adopt to these changes as they happen. There are several aspects of budgeting that have been identified as the main problems that a manager will encounter in the process of coming up with a budget in today’s business environment. These are the aspects that are discussed herein.
Worst aspects of Budgeting
Problems with people in the organisation
The budgeting process involves a scenario where the departmental managers prepare their department budgets and forward them to the CFO of the company who then consolidates them into one master budget for the whole company. However, the process does not go as smoothly as is expected due to the shortcomings of most departmental managers (Orlando, 48). In most organisations, the departmental managers do not take ownership responsibility on the budget estimates they make for their departments and neither do they take accountability for the same. Managers are also known not to give full cooperation and normally refuse to participate in the budget making process. Other CFOs have complained that their departmental managers do not even understand the budgeting process fully and therefore end up making mistakes that are left to the CFO to correct. The CFOs also have to deal with departmental budgets that are unrealistic because the managers try to make their budgets look attractive to the CFO and to senior managers (Hope and Fraser, 116).
Senior managers and board members are also another negative aspect of budget making because most of them may not be knowledgeable of the budgeting process but insist on contributing to the process. Such managers and board members are known to give unrealistic suggestions in an attempt to take the company to the direction that the shareholders want. This may not always be right because in most cases, the investment suggestions they make for example, may not be accommodated by the company’s finances (Subramaniam and Ashkanasy, 40). Senior executives and board members have also been accused of making crucial changes to the targets and key assumptions used in the budgeting process thus making the work more difficult for the CFO. They may also lack a clear direction on where the company is headed and therefore their suggestions and contributions to the budgeting process may be irrelevant (Gary, par 45).
Problems with tools
The tools used for the budgeting process have also been blamed as one of the aspects that make the process difficult for CFOs. One of the major tools that most CFOs have expressed displeasure with are the spreadsheets which are used by most companies for the budgeting process. Managers and CFOs have made various negative comments about the use of spreadsheets with some indicating that they are cumbersome to use and making changes on them is very difficult. Another issue is that arriving at specific data in the spreadsheet is impossible because of their manual nature. It is also difficult to group similar data together in order to make summaries and detailed reports of each data type or entry (Drury, 176).
Managers have also expressed their displeasure with spreadsheets by claiming that they make the budgeting process and very time consuming. The fact that they are time consuming in a business environment where time is very valuable for managers is a major defect that needs urgent solution. Use of spreadsheets is associated with a high frequency of errors due to the manual entry of data. It is also clear that spreadsheets have no ability to carry out a “what if” analysis which is a major characteristic of the budgeting process. This dissatisfaction with the use of spreadsheets for budgeting means that as much as they are excellent for carrying out financial calculations and reporting, they are not meant for budgeting (Wallander 415).
It is however important to note that, as much as most managers have expressed their dissatisfaction with the use of spreadsheets for budgeting, they are still the most commonly used budgeting tools by most organisations. Companies have however been known to combine the use of spreadsheets with other software applications such as Enterprise Resource Planning systems (ERP) in order to minimise the problems associated with spreadsheets and to make the process easier. Although most large organisations may have stopped using spreadsheets and adopted better budgeting tools and software programs, most small and medium sized companies are still using them due to their cheapness (Robinson, 76).
Ways of improving the budgetary process
As is indicated above, the process of coming up with a budget is less than a perfect process and may therefore need improvements in order to make it a more pleasant activity for all parties concerned. This is because a good budget will have a positive effect on the overall performance of the organisation. There are various ways of improving the budgeting process such as automating the process and adopting ERPs in place of spreadsheets (Jensen, 98).
Budget process Automation
The budgeting process can be automated in such a way that managers can place more focus on automating the work flow as well as understanding and optimising the process. An automated budgeting process makes it easier and faster to come up with a budget and therefore reduces the budgeting cycle leaving managers with more time to concentrate on the implementation of the same. Automation results in a situation where the budgeting process becomes a continuous process which therefore makes it easy for managers to respond to changes in the environment. Automation also makes it easy for the management to take advantage of investment opportunities that present themselves unexpectedly. This is because making adjustments to the budget becomes easy due to an automated workflow process (Hansen, Otley and Van der Stede, 102).
Using Enterprise Resource Planning (ERP) programs
Using ERPs to carry out the budgeting process can help managers because ERPs act as a single source of data as well as a common repository of data making it possible to create and measure all the departmental budgets and the entire organisational budget in the same place. Using ERPs makes the budgetary process more collaborative and informative because the information used is stored in one place where all interested parties can access it. The process also makes it possible to access real time budget data which allows stakeholders to follow the process from the beginning to the end. Such a situation makes it easy to identify mistakes in the budgetary process and make corrections immediately. Use of ERPs makes the process much easier because the problems associated with the use of spreadsheets are completely eliminated (Joshi, Al-Mudhaki and Bremser, 745).
Works Cited
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Hansen, Stephen C., Otley, David and Wim A. Van der Stede. “Practice Developments in Budgeting: An Overview and Research Perspective”, Journal of Management Accounting Research, 15, (2003): 95-116. Print.
Hope, Jeremy and Robin Fraser. “Who needs budgets?” Harvard Business Review, 81.2 (2003): 108-115. Print.
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Lublin, Joann S.and Dana Mattioli, “Strategic Plans Lose Favor: Slump Showed Bosses Value of Flexibility, Quick Decisions”. The Wall Street Journal, 2010. online.wsj.com. Web.
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Robinson, Marc. Performance Budgeting: Linking Funding and Results, New York: Palgrave Macmillan, 2007. Print.
Subramaniam, N. and N.M. Ashkanasy,. “The Effect of Organizational Culture Perceptions on the Relationship between Budgetary Participation and Managerial Job-Related Outcomes”, Australian Journal of Management, 26.1 (2001): 35-54. Print.
Wallander, Jan. “Budgeting- an unnecessary evil” Scandinavian Journal of Management, 15.4(1999): 405–421. Print.