Why budget?

Why budget?

Why budget?

One important purpose of financial planning is to inform management, the Board and owners about expected future financial results. There is sometimes too little focus on another purpose: to achieve good financial control.

In many organisations, financial planning is performed to far too great an extent by the finance department. Coordinators in the organisation are not involved closely enough in this work. The consequence can include:

  • Unsynchronised business-critical decisions
    Those with responsibility who have not been sufficiently involved in financial planning can easily have poor knowledge of the financial goals. They then risk taking their operation in a direction that is not in line with other parts of the organisation. Many goals are mutually incompatible. One example is profitability and market share. If one part of the organisation prioritises profitability, another part of the same organisation may be left with over-capacity, or vice versa.
  • Insights too late
    Those with responsibility who have not been sufficiently involved in financial planning are not given the opportunity to reflect on the financial goals in time. The dialogue about them and how to achieve them suffers. Insights about the need for adjustments and their implementation are delayed, which has a negative impact on the achievement of goals.

This can be disastrous for certain organisations. There can be a major discrepancy between the result predicted by the financial plan and the business’s actual performance.

Is the budget produced solely to inform management, the Board and owners, or is the intention also to achieve good financial control?

Achieving good financial control can be a challenge. It is critical that operational managers are involved in financial planning. Here are a few ideas for those working in the finance department who currently face a challenge in this respect:

  1. Clarify consequences
    Specify consequences, defining links to your own organisation and raising these in relevant forums. Clarify both negative consequences that you have actually identified and positive consequences that you believe can be achieved after a possible change.
  2. Participation through adaptation
    Adapt templates for data entry for operational managers. Let them plan based on the dimensions that are relevant from their perspective. The sales manager should maybe focus on customers or products, the project manager should maybe focus on resources or activities, and so on.
  3. Participation through simplification
    Simplify templates for data entry by identifying factors that drive income or expenses wherever possible. Categorise and price these. Have entry take place in numbers for these drivers. The amounts can be calculated with the aid of price lists in the background. Done properly, this can allow operational managers to focus on what is relevant and of major importance without getting lost in details that have a limited impact.
  4. Make sure there is time in the schedule to allow an iterative work method
    An iterative work method is a prerequisite for changes in the financial plan in one part of the organisation to achieve a corresponding change in another part. It is also when time is made to discuss iteration of planning and its plausibility. Any unrealistic assumptions can then be adjusted and have a relevant consequence in the different parts of the organisation.
  5. Repeat and focus
    Conditions facing the business often quickly become irrelevant. There are few organisations that can maintain that conditions remain unchanged for a whole year. Financial planning should therefore be repeated during the year to reflect these. An increased planning frequency while maintaining a high level of participation places greater demands on focus and simplicity. Each operational manager needs to be able to let go of details in order to focus on what is relevant.

Mikael Winander, Solution Architect, Effectplan