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Budgeting is an integral part of any business's financial planning. However, there is a common misconception that budgeting is solely about planning. This article aims to dispel this myth and highlight why effective budgeting requires so much more than just the planning phase.
The Wider Implications of Budget Planning
In 2009, L.A. Unified and other school districts in California were wrestling with budget planning. Focused solely on cutting costs, these districts decided to cut summer school programming for most students.
Students never received access to courses they needed to graduate. Child-care costs for families skyrocketed as they needed to either hire someone or stay home to take care of kids. The net result was increased costs overall, much resentment, and a process that was clearly broken.
The lesson here is that budget planning is more than a short-term exercise in reducing expenses. When we think about budget planning, there is a much bigger picture to take into account.
The Limitations of Budget Planning
Budget planning is often seen as a blueprint for the financial future. While this is true to an extent, relying solely on planning can lead to significant pitfalls. Real-world scenarios frequently deviate from what's on paper. For example, the 2008 financial crisis blindsided many companies that had robust budget plans but lacked the flexibility to adapt to sudden market changes. More recently, COVID-19 and the tech slowdown wrecked many well-laid budget plans.
The danger comes when planners believe that just by finalizing the budget, the results will automatically follow.
Unfortunately, this is not the case.
The Importance of Flexibility in Budgeting
Many organizations take a zero-tolerance policy to budget changes; the budget is set in stone at the beginning of the period and cannot be changed. Others take a more flexible approach, where the budget is constantly updated to reflect reality. Interestingly, both of these methods require a form of adaptability.
This adaptability is not about abandoning the budget but rather about making informed adjustments in response to real-time financial data and predictions based on the best information available.
For example, a successful direct-to-consumer makeup brand saw that they weren’t going to meet their budget from both a revenue and an expense perspective; they were spending more than expected to acquire each customer.
Instead of continuing to do what they had been doing before, they adapted; this included implementing hyper-targeted marketing campaigns, shifting focus to customer experience, utilizing social media platforms more creatively, and utilizing more advanced technologies and toolsets for sales process optimization.
These strategic actions enabled the company to increase revenue while decreasing costs, and thus meeting the budget originally set.
Continuous Monitoring and Adjustment
A budget is not a set-and-forget tool. It requires continuous monitoring and adjustment. Regularly reviewing the budget can help identify areas where the business is deviating from its financial path, whether that's overspending or underutilizing resources. By keeping a close eye on these metrics, businesses can make timely decisions to stay on track financially.
The critical element here is having access to real-time budget insights. Only with this powerful knowledge at hand can the right decisions be made.
The Role of Technology in Effective Budget Management
The advent of budget management tools and software has revolutionized how businesses handle their finances.
These technologies facilitate accurate forecasting, scenario analysis, and provide real-time financial insights, aiding in making more informed decisions. They also streamline the budgeting process, making it more efficient and less prone to human error.
A leading example is PayEm’s Budget Control module.
Having this technology in your corner means that you can benefit from:
- Real-time budget insights: Transition from Excel and traditional tools to a dedicated budget planning tool
- Unprecedented visibility: Immediate insight into actual versus budgeted spend, including in-process payments and committed spend
- Informed decision making: Centralized view for proactive actions
- Budget owner accountability: Owners access all relevant information, reducing finance team reliance
- Automatic BVA Calculation: Calculates variance between planned budgets and actual payments
- Integration with ERP: Synchronizes budget changes in ERP with PayEm
- Dedicated interface: Quick access to budget details and updates
- Real-time visibility with contextualized data: Enables proactive decision-making
Author HG Wells famously wrote in 1945: “Adapt or perish, now as ever, is nature's inexorable imperative.” Organizations that adapt in terms of utilizing best-of-breed technology will thrive, while those that push back against technology will be left by the wayside.
Budgeting is More than Planning
Effective budgeting is much more than just planning. It's an ongoing process that requires adaptability, continuous monitoring, and strategic alignment, among other factors.
It's time for businesses to reevaluate their approach to budgeting, and to leverage the latest technology to use budgets to drive business forward.
If you want to unleash the power of budgeting truly, contact the PayEm team today.