Coordination of activities in the company and proper communication between various departments and structures is a seemingly simple thing, but also extremely important, not only in the budgeting process, but also in every day of the company’s operation.
When referring to budgeting processes, however, it takes on a different meaning. The challenge of planning the company’s budget is such a type of coordination of activities that there is feedback between key structures – e.g. sales and production/ production and purchasing/sales and marketing etc. The information contained in the company’s budget should result from one another, so that errors can be corrected on an ongoing basis. Let’s imagine a situation in which the budget of a large company, e.g. a production company, is based on uncoordinated budgets of individual structures at the level of the organizational structure, and the sales, purchase, supply or marketing departments function as separate entities. In such a situation, the lack of coordination of actions becomes one of the basic problems of bad budget models.
Coordinated budget planning
But how can we know whether the budget plans created by individual organizational structures are coordinated and the budgeting models created on them are appropriate?
It is very difficult to verify if we rely on ubiquitous Excel in the organization, on which each structure in the company “imposes” its data. This model of the budgeting process is still used in most enterprises in Poland. The solution to this challenge is to study the effectiveness of sales, purchase or production planning, which is assisted by external tools in the form of CPM (Corporate Performance Management) systems. These systems can flawlessly operate on large, irregular data sets, excluding the risk of error associated with budget planning in spreadsheets. They also often have functionalities related to observing trends and creating predictions as well as finding irregularities in forecasts that occur in every organization. The consequence of a poor budget model, based on a lack of communication and coordination, can be growing stocks and inventories, and further, a reduction in the company’s working capital and the need for financing.
Level of planning the company’s budget
In view of the details presented above regarding the coordination of activities and appropriate planning of sales, production, supply and purchase budgets, it is crucial to build a substantive coordination model and the appropriate level of planning the company’s budget, i.e. choosing the appropriate level of planning detail.
What factors determine the appropriate level of detail for budget planning?
- Company Size – Larger companies tend to have more complex business processes and need more detailed planning, although budgeting for each individual index is not always necessary. Sometimes it is worth using the Pareto principle and plan the budgets of products that bring us 80% of the profit in more detail, the remaining products that bring 20% of the profit in less detail, and probably much more quantitatively
- Type of company’s activity – e.g. in the service sector require a different budgeting strategy than manufacturing companies
- Company goals and strategies – if the company is aiming for rapid growth, it may require a different level of planning that focuses on the products that give the greatest growth, and these products should be planned for lower levels of detail
- Planning period – short-term budget planning requires more detailed analysis
- Market stability – in an unstable business environment, budget planning requires descending to lower levels of planning
It is important to find the right level of planning detail for the company, a budget planned at too general level may not be effective, planned too detailed, it may never be completed. By imposing proper coordination and communication during budget planning, we take the first step towards building the best budgeting model for our organization.