It is Budget Time - How will you prepare your budget?

It’s Budget Time

It is that time of year, when the days are getting shorter and people are getting together for…

No, not the annual Christmas party, (it is that time too!), but time to prepare the annual budget.  The first of the year is almost here and with it a new fiscal year (for most of us).  It is time to get the sales projections together for next year and to look at projected cash flow and capital needs.  So, what are some of the things we should be thinking about as we complete our budgets?

One of the first things you want to keep in mind when you are doing your budget is to keep the process as simple as possible.  You don’t want to spend so much energy doing the budget that everything else in the company grinds to a halt, especially if you are a small business.  I talked about the issues around using simple solutions in last week’s post: Welcome to Practical Excel Accounting.  Click on the hyperlink to review that if you missed it.

Another consideration is what format to use when you are preparing your budget.  Should you buy a Budgeting Program designed specifically to help you manage the budget process?  Do you have a sophisticated accounting program that has budgeting built right into the program?  What about using Excel to prepare your budget?  Let’s look at some of the advantages and disadvantages of each.

Budgeting Programs are primarily designed for mid to large sized organizations that have a good sized accounting department (or departments).  These programs require a significant time investment in initial setup and maintenance.  Make sure that they integrate well with your accounting system, or your staff will also have to enter the budget in the accounting system and proof the numbers to the final budget.  An advantage of a Budget Program is its ability to coordinate multiple managers and business units.  That is what they are designed for.  A big disadvantage is having your accountants and MANAGERS have to learn how to use the program.  Accessing the program may be another issue for the managers, although more and more programs are offering web based solutions and they are starting to outnumber the ones that you manage internally on your own server. 

Accounting systems are another option for preparing your budget.  This can work in any size organization.  Set up is normally less involved than what is required for a Budgeting Program.  The learning curve for your accounting staff is typically quick, but you still will have to teach your managers how to use it.  The good news is that your accounting staff should be able to train the managers if they are sharp with their Accounting software.  A big advantage is the integration with the accounting system.  You should not have to do any manual entry with this type of system, although you should always make sure the numbers transfer over correctly. 

Disadvantages include either lack of sophistication or over-sophistication.  The system is more advanced or behind the industry they are trying to serve.  Another issue is that organization’s internal budget processes usually DO NOT match the processes required by the accounting software.  This can be a real problem for some organizations.  This comes from software companies not understanding how the processes flow in the real world.  This creates a mis-match between the Accounting program processes and how it is really done by the accounting department(s).

Excel can be used for any size business, but is better for small to medium organizations.  There are a number of advantages.  Excel is a common tool that many organizations use.  Because of this, the learning curve is quicker.  Properly set up and configured, it can save you money you would otherwise have to invest in accounting and budgeting software.  Excel is especially useful for smaller businesses because once you set it up, you have a base budget format that is good as long as you are in business.  As you grow, you can easily add revenue and expense items as needed.  Excel can be set up the way you do business, instead of having to adjust your business to the way a vendor’s software works.   

A disadvantage of Excel is that it can get out of balance.  This is something you can prevent by putting some tie out and cross footing in place, something we will address in a future blog.  Excel budgets also need to either be entered in the accounting system manually or imported.  This is not as big an issue in small to medium organizations because the volume is manageable and most accounting systems have an Excel import feature.

The advantages and disadvantages we have discussed should make your decision on which method to use easier.  Pick the solution that best matches your size and procedures.

The annual FREE online Excel Budget Prep workshop is starting soon.  Sign up with just your email address for the next session by using the CLICK HERE link.