The well-used slogan “to fail to plan is a plan to fail” is often cited as a compelling reason for the use of budgets. Today where in business “the only constant is change”, the requirement to be agile has come to the fore. Can an apparently fixed view of the next twelve months, shown in an annual budget, be married to the need to be agile?
In short, the answer is yes provided budgets are both “living” at the transactional level and used on a timely basis at the reporting level.
A budget is not a set of handcuffs
Technologists today talk about fail fast systems and minimum viable products. The old days of total commitment to a huge project are gone and now minimum viable product offerings are developed which may fail fast and avert a much more significant failure.
This thinking also has a role in budgeting corrective action, which needs to occur not only because the budget has been missed but because the fast moving world may expose the budget to be fundamentally flawed.
Knowing whether the course should change is dependent on the timely use of data.
Two key measuring points
Each time a company makes a financial commitment it sets a path. If that commitment is not contemporaneously understood in the context of the budget then the budget can begin to lose some relevance as a guide to the company’s direction.
When transactions are reported collectively in management accounts they define holistically where the business stands against the budget.
In a fail fast world as the lawyers like to say “time is of the essence”.
So how do UK businesses measure up?
Recent research in our ‘Changing trends in the purchasing processes of UK businesses’ has found that:
- nearly half – 48% – of finance decision makers in UK businesses admit that their company does not use budgets until the production of management accounts and
- 31% of businesses are delaying managing accounts while waiting for a backlog of supplier invoices to be processed.
Only using budgets at the point of management reporting significantly reduces business agility, and this is made worse where reports are delayed. Variances to budget require timely corrective action. There are often problems down the line where further open purchase commitments are not visible in the management accounts.
Expenditure control data
Purchase requisition to order systems identify and collect data on commitments. Where these make the budget visible they are a powerful source for early detection of problems and help a business either take corrective action to get back on track with budget or reassess the budget. The above survey suggests around half of UK businesses do this.
Reliable management accounts are dependent on the timely, complete and accurate processing of supplier invoices. The above survey suggests close to one-third of businesses in the UK are prioritising completeness and accuracy over timeliness, waiting for supplier invoices to be processed prior to closing the accounts. In a fast-moving world such delays can be fatal.
It is not a coincidence that businesses that fail are often businesses that have a poor payment record with their suppliers. Not only for the obvious reason that a business that is failing to generate cash will struggle to pay its suppliers but also because slow processing of supplier invoices is a source of self-harm removing agility. The early recognition of problems and corrective action is only possible with timely and reliable expenditure data. This requires investment in the purchasing and/or payables processing.
Achieving the right mix between people, process and technology normally gives the best return on any investment.
A predominantly manual approach to purchasing and payables processing tends to be both costly and high risk. Throwing people at a problem can be a short-term solution but it is often neither sustainable nor scalable.
An automated approach to purchasing and payables processing reduces cost and risk and is sustainable and scalable providing improvements in efficiency, visibility and control.