One of the most non-value-added activities within financial management is budgeting. Budgets are prepared to allocate and control how resources will be used in the future. Unfortunately, the future is hard to predict and upper-level management doesn’t always communicate with people who prepare budgets. Because of poor communication, budgeting becomes an exercise in futility. Some of the main problems associated with budgeting are:
– Poor communication from decision-makers.
– Too many people involved in the process.
– Budgets don’t help manage our business.
– Budgets are outdated by external events.
– Budgets are difficult to revise.
Since upper-level management often circumvents the budgeting process, the first thing to do in budgeting is to find out what does management expect from the budgeting process ? Next, make sure management decision making is linked to the budgets. You can accomplish this by creating budgets within the strategic planning process. Don’t forget to include external factors when preparing budgets. Outside events and issues can impact your budget estimates.
Budgets should be easy to revise. When new planning data pops up, your budgeting process should adopt and accept this new data. Hold you’re cost centers responsible for meeting their budgets. This can force feedback from end-users for improvements in the budgeting process. If you find yourself always revising a budget, consider preparing several budgets or setup a contingency budget if you expect changes. Prepare the basic outline or summary of a budget and get approval before you spend lots of time preparing detail budgets. Or better yet, try to reduce the detail in your budgets to streamline the entire process.
Budgeting should be a dynamic process within strategic planning. The more your budgets can react to change, the closer budgeting will be to a value-added activity. If your budgets don’t add value to decision making, than it’s time to improve the process.