Where does the problem of waste in the budget come from? Who should create the budget? These are the questions we will try to answer in the 6th part of the “Challenges of budgeting in a large company” series. We have several substantive possibilities who should be responsible for creating the budget in the company:
- The company’s management has overall responsibility for creating and approving the budget. It is the superior authority that makes strategic decisions and defines the company’s financial goals.
- CFO: The CFO is a key figure in the budget process. He is responsible for managing the company’s finances, overseeing the budget and financial forecasts, and providing the financial data necessary to make budget decisions.
- Managers: Representatives from various company departments, such as sales, marketing, production, research and development, human resources, etc., are involved in the budget process. They bring their financial resource perspectives and needs to their departments’ budget planning.
- Financial controllers: Those responsible for financial control and reporting are vital members of the budget team. They help monitor spending, analyze financial data, and ensure compliance with budgetary targets.
- Financial Analysts: Financial analysts provide data and analysis that support the budget process. They prepare financial forecasts, study market trends, and help make decisions about the allocation of financial resources.
- Internal and external auditors: Auditors, both internal and external, may be involved in the budget process. Their role is to verify that budgetary procedures comply with accounting and financial reporting principles and that appropriate controls are maintained.
Who is more important, the board or managers in the process of creating the company’s budget?
We already know the possible scenarios of the units responsible for creating the budget, although in practice it is most often a fight between the board and managers. The budget, often imposed by the CEO/board, is called the TOP-DOWN budgeting model. This is a model used in particular in smaller organizations or, for example, in production organizations where the president/management board knows the entire business very well, and other managers are unable to prepare a budget because in some areas they lack substantive competence.
The second scenario assumes that the budget is created by managers, which in turn is called bottom-up or participatory budgeting. In this case, the management board is responsible for setting budget directions and goals, i.e. general guidelines on the basis of which the budget will be created. It remains crucial to determine the main KPIs for the centers of responsibility (designated on the basis of the responsibility structure, not the organizational structure, as we wrote here). When setting KPIs, remember not to lead to a situation in which managers will not be able to meet the assumptions (sometimes KPIs are detached from the rest, e.g. cutting the budget by 10%). On the basis of KPIs constructed in this way, the manager creates a budget that must be defended by the management board.
Budget games and creating a company budget
Budget games are tools used in financial management that allow you to simulate and explore various budget scenarios in a controlled and interactive form. They are used to better understand the impact of various decisions on the budget of a company or organization. They are designed to involve participants in the budget planning process and help them understand the complexity and financial implications of their decisions. Using them, the board or budget team can experiment with different scenarios, taking into account variables such as revenues, costs, investments and other factors affecting the budget. However, they often lead to internal conflicts in the organization, because in practice they are based on overestimating or underestimating the costs of a given structure, overestimating the benefits of processes or showing false effectiveness of given activities.
How to avoid budget games?
An alternative to creating a company budget, in order to avoid budget games, is budgeting from 0, which is important mainly in parts of the organization where costs fluctuate with the size of the activity, i.e. in sales departments or departments of production.
Hybrid model in creating a company budget
Budget created by the board or by managers, using the 0 or incremental methods? Problems with the answer to the question of how to budget always result from the fact that we choose one budgeting model. Let us remember, however, that we can build and rely on a hybrid model and, for example, differentiate the level of detail depending on departments. The level of detail in the budget across the organization does not have to be exactly the same and created in the same, one way. It’s important that the budgeting process is open, collaborative, and considers the different perspectives and interests within the company.