Most large companies start their budgeting process about six months before the start of the financial year. The pre-planning phase typically starts in spring, when the budget’s foundations are laid. And the real planning then takes place in the fall, when budget decisions are made. During that time period, it’s nearly impossible to get people from the finance department to attend seminars, arrange business meetings, or discuss business. They’re so busy!
Creating an annual budget is by no means an easy exercise. It can take months to draft and weeks to finalize, especially if your organization still uses manual ways of gathering data. And that’s not the only budgeting issue we see in businesses today.
Here are four common budgeting mistakes and how to prevent them:
- Carving your budget in stone – “It took us months to create this! Let’s not mess with it!”
Many organizations today treat budgeting as a one and done ordeal. They’ve gone through the budgeting exercise, everyone is happy with the budget, and no one wants to hear about it again until next year. The reality, however, is that your budget is outdated the moment you write it. There are simply too many unknown internal and external factors that might impact your costs and cash flow throughout the year. Take the 2020 COVID-19 crisis, for instance. Rather than a “let’s stick with what we have” attitude, organizations must learn to make continuous budget adjustments to best support their business operations. - Considering your budgets as an “authorization to spend” – “Yes, money! Let’s spend it!”
Many managers mistakenly consider their budgets as an authorization to spend. They get their budgets approved and off they go — mindlessly spending money left and right as if it was their duty to the company. This can be a value-destroying attitude. If you’re granted a budget, make sure to spend it wisely. All your spending decisions should be made with careful consideration. Will your decision lead to more profits? Is it smart? Is it in alignment with the company strategy? Is it necessary? - Missing a good business opportunity because of a lack of budget – “We cannot pursue any major growth initiatives. It’s not in the budget.”
Having a lack of budget doesn’t translate to “cannot spend.” Do not pass on opportunities that are guaranteed to yield profits. If your budget won’t quite stretch to the full amount you need, for instance, to develop your department or pursue a large-scale project, share your ideas with the CFO and the rest of the leadership team. If your idea is justified, there might just be some “spare change” in the company’s budget bucket. If you don’t ask, you will never know. - Using static spreadsheets – “But this is how we’ve always done it.”
Using static spreadsheets to manage your budget introduces many challenges. Static spreadsheets are often tricky to update — making it difficult for organizations to keep track of their actual spending and revenue. They’re also prone to human error and laborious to reconcile when multiple versions exist.Instead of sticking with the old way of doing things, consider investing in a business budgeting software with a real-time visibility and collaboration features. Look for one that links budgets to business objectives, integrates with your existing systems, and allows you to forecast cash flow, track your spending plan, monitor trends, generate reports, respond to market changes, and make strategic spending decisions. - Playing the guessing game – “How about if we just guesstimate everything?”
Make sure that your company’s budgets are based on sound business scenarios and investment decisions. Coming up with budget numbers on a whim will do your business no good. Be diligent, accurate, and realistic when creating budgets, but know that things may change. Throughout the year, if your hypotheses are no longer valid or if your business surroundings are changing — change the budget.
Having a solid annual budget is often considered as one of an organization’s most important financial tools. It provides organizations with the big picture overview of their finances and gives guidance on how to best use their money throughout the year. To stay on top of the budget, it’s important for organizations to treat their budget as a dynamic plan for the future, embrace the benefits of modern budgeting technology, and approach budgeting as an ongoing, agile activity, not a rain dance ritual that happens once a year.
