Monday, 18 November 2013

Adapt or Die - The Evolution of Budgeting

Adapt or die – this is as true in business as it is in life. If you keep doing things the same way ignoring the change all around you, others will overtake you and you will be left with nothing to sustain you. Budgeting is no different. If you remain stuck in the old way of doing things, your business will continue to lose money, waste valuable resources and work from old unreliable information that is largely ignored by those who truly manage your company.

A long time ago and far away, businesses operated using ‘top-down budgeting’ - the finance department had to put together an overall budget for the business with strategic input from the FD, which was then broken down into each cost centre and presented to the cost centre managers as a done deal.

Since businesses are greater than the sum of their parts, randomly assigned budgets built from historical information cannot direct or reflect the financial performance of cost centres with any realism. As a result, top-down efforts are largely ignored by cost centre managers, and the business loses the benefits of a budget that accurately reflects their business needs.

Recognising the importance of the budget and having the input of cost centre managers has been a huge step in the right direction for budgeting as a whole and has resulted in ‘bottom-up budgeting’.

This is a collective process that involves cost centre managers providing current individual financial information relevant to their own cost centres. The proven outcome is a more accurate and credible budget, representing a unique expectation for every cost centre, created by an operationally involved manager.

It empowers those in charge of their domains with the tools to set expectations for themselves, that will be critically examined by the financial department and used to hold managers accountable for their performance. With responsibility comes a sense of ownership, leading to accountability, more accurate budgets and good spending practices.

The catch however is that although many companies recognise the value of this approach, their execution often falls short. Businesses still tend to compile budgets using central spreadsheet templates distributed to the cost centres for completion, falling straight back into the seemingly endless cycle of amendments and approvals.

This can quickly create a time and opportunity cost of hundreds of billable hours of operational as well as financial staff, and more often than not and uses a format that alienates non-financial operational managers.

While this version of bottom-up budgeting is at least more accurate than the top-down method, it is hugely wasteful, especially when the organisation has more than just a few cost centres.

The only solution is the final evolution to real-time, online systems that are easy to implement, use and understand by financial and non-financial managers. These systems will support bottom-up budgeting by allowing cost centre managers to input current relevant information into familiar uncomplicated spreadsheets that are available immediately to financial managers; cutting budgeting cycles to three weeks or less and therefore saving valuable resources and money.

In the end, recognising the need to adapt is the first step and then you just need to keep on evolving. Bottom-up budgeting completed with the correct tools results in greater financial empowerment, engagement and knowledge throughout the business. The resulting sense of ownership leads to greater sharing of responsibility and accountability within business domains, allowing their performance to be driven by their own expectations.


The results are not just more efficient and effective budgets, but just as importantly, better use of company resources. Freeing up business managers to run the business and the finance department to strategically guide the company’s performance can only result in a smarter, more upwardly mobile business. Adapting will not only mean your company will live, it will mean it will thrive and grow.

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