The determination and presentation of the annual budget is an important task for every company, that the CFOs or Controlling are usually responsible for. It shows the sales goals and the economic resources that are necessary to reach them.
Budgets are a key planning tool in decision-making, since the management can use the different scenarios to simulate their effects and thus determine the company's ability to handle them. Budget controlling is one of the most important integrated control systems for the economic and financial activity of a company, as it allows us, among other things:
- To compare the actual data with the set goals
- To quantify and interpret possible differences
- To set short- and long-term goals
- To set priorities when allocating resources
- To take corrective action if there are deviations from the budget
- To involve the entire organisation in the implementation of the goals (which should be achievable and on which there should be the greatest possible consensus)
Before presenting a budget, you should ask yourself a couple of questions.
How extensive are the budgets?
The company's accounting department must be prepared for budget monitoring. Budget monitoring can be performed at a general or detailed level; and this level of detail should be known for the budget. In other words, if a company uses the cost and performance accounting method, budgets can be prepared to this level, or remain at a more general level, where budgets are compared with the economic and financial reports from financial accounting.
Is the budget realistic?
The budget of a company is no wish list, but it is based on a thorough analysis and reflection of the strengths, weaknesses and potentials of the company, while also taking the historical data into account.
What we want to achieve is one thing; what we can achieve is another, therefore budgets must be realistic. If the goals that have been defined are unattainable, this can lead to demotivation within the company.
If the projected demand is not realistic, the rest of the budget will not be realistic either.
Is the budget flexible?
Budgets need to be flexible to a certain degree. The idea is not to readjust them at the slightest change - after all, the whole purpose is to respond to deviations from the budget - but there must be room to adapt to specific circumstances.
For example, if the budget takes fluctuations in demand for goods and services into account, it will be easier to adjust production quantities and associated costs to different scenarios.
If the budget is flexible, we are prepared for challenging scenarios, as well as those in which the demand increases significantly, and the company needs to expand its capacity. This type of budget consists of a fixed and a variable part to cover both fixed costs and costs that may vary throughout the year.
Do we have the management's approval?
When determining the goals, both across the company and for the individual departments and divisions, there should be the highest possible consensus among the management involved. Likewise, there should be consensus on the resources that need to be provided to achieve the goals. Without this agreement, it will be more difficult to achieve the goals, collect data and monitor budgets.
The problems that arise from a lack of consensus can be minimized using software to automate the determination and monitoring of budgets.
What is the time frame of the budgets?
Budgets should be determined for at least one year and divided into twelve months for easier monitoring, although an even longer-term view is desirable in accordance with the company's strategic plan.
Am I going to monitor the budgets?
Budgets are not mandatory since they are not required by the commercial law. Therefore, if neither a review of compliance nor an analysis of any deviations takes place after the budget has been determined, the time spent on the budget could have been saved and used for other tasks.
After all, the work put into the budget is only meaningful if deviations from the budget are monitored and corrective measures are taken based on them.
Budget monitoring is often difficult for companies that determine their budgets in spreadsheets. Reasons for this are the loss of data and the increased difficulty of adapting a flexible budget to different scenarios.
To facilitate monitoring, you should use software that allows the automation of the entire process.
Do I have the right software to compare actual and planning data?
When it comes to determining budgets, many companies still rely on spreadsheets, and that's certainly better than nothing. However, once a company reaches a certain size, reliable software for annual financial planning and budgeting is essential. The software should cover the following features:
- Automation of planning processes
- Easy administration of a flexible budget that can be adapted to different scenarios.
- Dynamic monthly, quarterly and annual planning
- Budgeting on an analytical level
- Easier analysis of deviations
LucaNet's financial planning and budgeting software is an intelligent, easy-to-use and transparent solution. It offers you everything you need to access the right information for making business decisions at any time.
Written by José Ramón Fernández de la Cigoña Fraga, Finance Director
In this article, we will show you how to achieve meaningful financial planning with the right software. Four tips for an efficient process and high data quality.