We have temporarily paused our series on Occupational Fraud to bring you two articles on Budgeting to stay relevant to budgeting season.
Just About Time for the “B” Word (Part 1 of 2)
Budgeting and Planning
By: Mark Palmer, President e:countable, LLC
When I was fresh out of college with an accounting degree and very green, I was excited to meet new colleagues and start my career. People were very friendly and welcoming, that was until they heard what department I was in. As soon as they learned I was from the Budget Department, smiles turned to scowls. I couldn’t understand it at first. After all, I loved developing forecast models, analyzing trends, identifying cause-and-effect relationships, and making projections. The only people I know that were received worse came from Internal Audit.
After spending the first 10 years of my career in budgeting and planning for three large public companies, I made the move to work for and with privately-held companies. I found the reaction just the opposite when introduced to most business owners. Why the difference? Value and perspective. The department managers in the public companies I worked for viewed the budget process disdainfully because their performance was tied to these budgets but they had little influence in their development. They were told their bottom line must be “X”, and to make the detail work. On the other hand, business owners have a vested interest in the success of their companies and welcome tools that help their business succeed.
Still, many people will say “nobody can predict the future so why bother trying”. So what’s the value in budgeting or planning if nobody can predict the future? The late Andrew Grove, former CEO of Intel stated “The preparation of an annual plan [budget] is in itself the end, not the resulting bound volume…. To prepare and justify, people go through a lot of soul-search analysis and juggling, and it’s the mental exercise that is valuable”. Dwight D Eisenhower and Peter Drucker put it more succinctly: “Plans are worthless, but planning is invaluable”. I agree with both of these quotes.
Budgeting is one form of planning that is typically developed for one year, addresses every facet of your business, and should be treated as a living document. A few examples of the value of budgeting in addition to, or derived from the mental exercise include the ability to:
Anticipate operating and financial results (and fiscal health of your company) under multiple scenarios (sensitivity analysis)
Understand the financial and operating resources you will need to achieve the results
Decide what you will do in various circumstances while in a controlled environment to prevent making decisions emotionally during a crisis (good or bad)
Improve financial results
Obtain more favorable financing for growth, consolidation of debt, etc.
Hold employees accountable and evaluate their performance
Mitigate the risk of fraud
So now that you know how important budgeting is, make sure to read our next article which will cover the actual budget process, including what to do and what not to do. If you would like assistance in the budgeting or planning process for your company, please contact us at (757) 962-1080.
Mark Palmer: Bio