When selecting a business solution, whether it’s for managing inventory, supply chains or customer relationships, you’ll hear the buzzword “flexibility” thrown around quite a bit as a main value proposition. While I absolutely agree that flexibility is key, when it comes to budget modeling, I would argue that some “inflexible” rules are the only way to ensure true accuracy and compliance.
Let me give you an example: this past summer in Tennessee, the Cheatham County Commission called a special meeting so that the Cheatham County School Board could explain an $878,000 revenue mistake in the school’s budget. The source of the error? A formula in a spreadsheet calculated a subtotal of $439,000 in revenues two times too many.
While the scale of this error is extraordinary, the scenario is common enough. Here’s why: A useful, living budget model is owned, updated and referred to by the entire company, and not just the finance team. That means most of the contributors — the VPs of sales, marketing, IT and so on – will have little or no training in finance or understanding of the complexity that goes into creating and maintaining a budget model. As we see from the above example, it’s all too easy for non-finance people to enter inputs incorrectly. These errors, in turn, can have negative ramifications on your reporting. Some things must be set in stone: math, formulas, and accounting rules must be absolutely immune to human error.
Budget models can (and should) be programmed to eliminate the inherent risks that stem from broken code or from users who inadvertently violate accounting rules by entering data incorrectly. It can also be programmed to ensure that all inputs are processed in strict adherence to how your company is structured.
Put another way, rigid budget rules can ensure that inputs never occur in a vacuum. Enter one expense or loan payment or update rent calculations for a particular facility, and multiple updates should automatically flow through your budget plan. Strictly enforced rules that govern payment terms, inventory impact, related expenses, etc. should be applied automatically so that all inputs properly reflect their complete impact on the P&L, Balance Sheet and Cash Flow. This is the only way to ensure you have a flexible budget and protect yourself from unpleasant circumstances like the one described above.
But flexibility is also essential for numerous reasons. To begin, the users who you’ll count on to contribute to your budget model on a continuous basis are looking for one thing: familiarity. They have no time or patience for learning a new interface. To get their buy-in, create interfaces that are customized to each user, with columns, rows and data he or she will recognize. In other words, what your VP of Marketing sees should be different than what your CEO sees, buttressed by role-based security rules.
More importantly, a budget model itself must be inherently flexible. All businesses need to plan for strategic change, such as an office expansion or acquisitions, and to act on risks introduced by market dynamics. It’s easy enough to update numbers, but updating the underlying model itself is when things begin to get ugly. (Just adding an account can break a budget in Excel!)
Let’s say your CEO believes that, by closing one division, the company will have the cash to expand another more profitable one. Your budget model should allow you to test that assumption or what-if scenario by simply deleting one division from the model and adjusting the additional expenses for the other. In other words, a “self-programming” budget model will allow you to test what-if scenarios without needing to go in and modify the model itself.
Of course, this level of flexibility is only possible if inflexible rules for processing inputs are in place, which is why I stand by my assertion that when it comes to budget models, you need both.
John Orlando is CFO of Centage Corporation