Budgeting
Budgeting is one of the most hated management processes there is! And why not?
Creating budgets takes too long, is mired in detail, generally revised last-minute to meet some target and once finalized, the results are generally made obsolete by real world events. Yet budgeting characterizes an organization. It set allocations for resources, establishes a basis for evaluating performance and shapes management’s decision making over an entire year. Most organizations’ budgeting process is flawed!
Budgets are Time Consuming!
The average company dedicates 200 days of management effort to the budgeting process for every $1,000,000 in revenue. For the average bank or credit union, this translates into 200 days for every $1.0 million in net interest income. You may say, “It doesn’t take me that long!”, but consider not just the time required to put the budget together but also take into account all the budget meetings thereafter.
Then, if for some reason earnings fall short of budget projections, think of the effort devoted to figuring out not just what went wrong but how you are going to get back on track to the budget.
With Tuff Risk 360’s Interactive Budget module you will have your budget completed within 30 days, from start to finish, whether you have two retail outlets or 800. With all the “what-if’s” you want and all the forecasts you need. It’s that fast!
Budgets Set You Up to Win or Lose!
Even though very few organizations still budget to the penny,everyone distills the budget down to one number; “Our sales budget is $1,000,000”. “Our budgeted financial margin is $1,000,000”. There is always a defining number for every organization, department, branch or retail outlet.
What are the odds that actual results will equal that target? Not very high! And if they do, rarely will the myriad of numbers underlying that budget align with initial targets. Many budget numbers will be higher than expectations and others will be lower. The only line items to meet budget expectations will be fixed expenses, such as rent and the office cleaning contract.
There is a lot riding on this one number; bonuses, new hires, service levels just to name a few. And with only one target level, management can only win or lose.
A More Intelligent Approach to Budgeting
An intelligently built budget will communicate not just the dollar amountof the line item being budgeted but also the confidence level of the estimate. This can be done by either setting the budget as a range or by indicating a level of confidence associated with an estimate and let the Tuff360’s Interactive Budget module calculate the range. The broader the range, the less confidence in the estimate.
As an example, if heading into labor negotiations just at budget time, a confidence level of around 60% may apply. Having just signed a five year lease for equipment, one can budget these expenses with a 100% confidence level. In the end, every budget created with the Tuff Risk Interactive Budget software will roll up just like a conventional budget and will calculate the upper and lower range values.
Not comfortable with a range? Then simply set all confidence levels to 100%. Even so, you can always test various confidence level scenarios just to be sure, and we know you will.
Are You on a Never Ending Budget Cycle?
Does your budget process help your organization optimally allocate resources and rapidly adjust tactics to changing market conditions, or is it a painful undertaking wrapped up in vast amounts of detail that bears little resemblance to what will actually happen?
The answer to this question lies in the answers to the following questions:
- Creating the budget takes about three months.
- There are at least three iterations of the budget.
- Senior management generally makes last minute adjustments or cuts.
- Major time is spent on the allocation of head office costs.
- Bonuses are tied to “beating the budget”.
- The budget is built using a spreadsheet.
- Once the budget is completed, that’s it…no changes allowed.
- Analysis of actual to budget variances rarely identifies the cause.
- Line or branch managers have little control or take very little ownership.
Learn to Love Budgeting
Wouldn’t it be fun if budgeting was effortless. And numbers automatically flow into the budget from several different directions, whether historical, forecasted or just simply input. Imagine if branch managers actually took ownership by running their own what-if scenarios and once decided, are able to seamlessly integrate their regional budget directly into the master budget. Think about being able to forecast earnings under a variety of outlooks.
With the Tuff Risk 360’s Interactive Budget module, scenario analysis and actual vs. budget comparisons are also easy and straight forward. All data, current and historical, is conveniently uploaded from the trail balance. Forecasts are based on a variety of key factor assumptions affecting the outlook of your specific organization, or even your industry. Forecasts can be tied to interest rates, foreign exchange, customer/sales growth, the price of silver or even tourism.