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The Transition from Spreadsheet Budgets to a Packaged Application

A Practical Guide for Small to Mid-Sized Businesses

Published: January 23, 2008

In many cases, small and medium-sized businesses still manage the difficult and error-prone process of budgeting on spreadsheets even though Excel's capabilities are often inadequate to support the critical nature of budgeting and forecasting.

Most large companies have already liberated their budgeting process – at least on the official level – from spreadsheets. Small and medium-sized businesses (SMBs), companies with 25 to 2,500 employees, in many cases still manage the difficult and error-prone process of budgeting on these same challenging spreadsheets.

Once the SMB is hit with budget-related issues too painful to ignore, such as version control, complex macros, formula errors, and inability to easily draw in and consolidate input from needed participants, it would seem likely they’d adopt a packaged application for budgeting. But breaking the spreadsheet habit is a difficult step for many, and finance executives often postpone the decision to migrate to a more purpose-built budgeting solution and stick with “the devil they know.”

When the Spreadsheet Becomes a Disadvantage in Budgeting

Good budgeting practices are structured to minimize errors and inconsistencies, drawing in all the necessary participants to contribute their business experience and the unique perspective of each department. Best practice in budgeting entails a mixture of top-down guidelines and standards, combined with bottom-up individual knowledge and experience. Excel, the de facto tool for budgeting, is a powerful personal productivity tool. Its current capabilities, however, often are inadequate to support the critical nature of budgeting and forecasting.

There comes a point when a company’s reliance on spreadsheets for budgeting becomes an impediment to effective decision-making and analysis. There are several clues to detect this transition point before it leads to severely ineffective decision-making, lost productivity and lost opportunities. (See the following section.) If a number of these conditions apply to your organization, it’s probably advisable to consider migrating out of the spreadsheet environment.

Spreadsheets can accommodate many tasks – but, over time, some of the models running in Excel may grow too big for the spreadsheet application. When companies regard budgeting as a key business process, it becomes more apparent that it should be separated from the idiosyncrasies that spreadsheets allow.

Programming in a spreadsheet model requires complex macros, creating opportunities for formula errors and broken links between workbooks.

It is common for spreadsheet budget models and their intricacies to be known and maintained by a single person who becomes a vulnerability point with no backup. There are other maintenance and usage issues. Spreadsheet budget models are difficult to distribute and even more difficult to collect and consolidate. Data confidentiality is almost impossible to maintain in spreadsheets, which are not designed to hide or expose data (i.e., payroll) based upon each user’s role. These are drawbacks for corporate governance and make the audit process more difficult.

Warning Signs That Your Budget Process Has Outgrown the Spreadsheet

1. No single version of the truth guides or emerges from the budgeting process. Managers need to roll multiple budgets into a single enterprise perspective, but it’s too hard to do because there are too many variations in roll-up structure.
   
   
2. Ownership and accountability by business users have disappeared, and control over consolidating the budget has been concentrated to a single person.
   
   
3. Financial statements are not fully integrated because it is too time-consuming to set up or the model was modified too many times to ensure no errors.
   
   
4. Detail becomes impractical and almost unattainable. Spreadsheets grow so large that budgeting for some line item expenses or revenue items is done only at a consolidated summary level.
   
   
5. The budgeting models break frequently with changes to data structure or roll-ups.

First Steps Toward Enterprise Budgeting

A best-practice approach to moving beyond spreadsheet-based budgeting would start with these steps:

• Fully understand your current budgeting model. It’s likely to contain embedded assumptions, formulas, reporting requirements and experience that are important to transfer over to a packaged application.
  
  
• Determine what works and what does not work in your current process. For example, if your particular business model requires the bottom-up forecasting of many participants, you need a packaged application with strong collaborative features.
  
  
• Secure high-level executive sponsorship and ensure that you will have sufficient project justification and funding.

Conclusion

The primary benefit of graduating from pure spreadsheet budgeting to a more advanced application is a more accurate, inclusive, and timely budget with significantly reduced cycle time. Companies often report that they can move from annual budgeting to quarterly budgeting as a result. Faster, more informed budget-related decisions can also be enabled. For the SMB, the ability to assess profitability by product line, customer, region, and channel in real time helps determine where to put resources, cash, and personnel. The enterprise budget gives a complete view of your financial organization, blending top-down and bottom-up perspectives, incorporating historical and forward-looking information.

The implementation and maintenance requirements of the solution should be carefully considered. The project’s strategic aims, budget, and executive sponsorship need to be clearly defined. Recognize that your firm will likely depend upon this system as part of standard operations for a 5 to 10 year period. Conducting the necessary due diligence to explore available alternatives is a worthwhile investment.

This article is an excerpt of a broader white paper on the same topic. For the complete white paper, including tips for selecting a technology solution in this area, go to
http://www.bpmpartners.com/bpmcentral_whitepapers.shtml.  

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