For companies with fiscal years beginning in January, summer often marks the beginning of the long, inefficient and hassle-inducing ritual known as “annual budgeting.” CFOs and finance teams know this ritual all too well. It usually starts with a simple spreadsheet and ends months later with someone ready to jump off a cliff.

The typical corporate budgeting process as it exists today is wildly inefficient because it is a study in spreadsheet version-control. The finance manager will send an Excel doc to the sales manager who ‘guesstimates’ what kind of budget he’s going to need 18 months in the future. Then the sales manager passes it to the next person. Rinse and repeat among dozens of managers until, months later, a final spreadsheet is produced for executive approval.

Is this the best budgeting process we can come up with in 2013? Within today’s dynamic global marketplace, corporations are faced with real-time decision-making and pivoting goals to keep up with competition, so a slow person-by-person, months-long budgeting process just doesn’t work.

Fortunately, there is a better way.

To improve budgeting, companies should make the transition to continuous budgeting, in which corporate budgets are planned monthly or quarterly rather than annually. Continuous budgeting can save countless labor hours while improving the accuracy of the budgets themselves.

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For example, imagine this typical annual budgeting scenario: the product manager prepares his 2013 fiscal year budget in October of 2012, and for Widget A he budgets $10 million for the month of April. However in February the company decides to discontinue Widget A and instead shift demand to Widget B, voiding Widget A’s budget going forward. For finance and budgeting managers, this scenario is a nightmare because it means digging into the settled budget document from months earlier and shifting resources around, reallocating already-determined budgets for March, April and the rest of the fiscal year.

This creates a cascade of budget implications for the entire department. However, in a continuous budgeting environment, there is no ‘settled’ budget. Finance managers, product managers, marketing and sales all collaborate month-to-month to determine upcoming budgets.

ERP Can Help

When it comes to budgeting, Enterprise Resource Planning (ERP) systems are typically left out in the cold or used only as a reference for last year’s numbers. The reason? ERP systems are great at collecting and storing information, but they are notoriously weak at analyzing data and fostering collaboration.

But contrary to popular belief, with the right set up ERP systems can be used to analyze data so market dynamics are taken into account month-to-month or quarter-to-quarter. In other words, a collaborative ERP system can be the key to a successful continuous budgeting process.

With collaborative ERP and budgeting tools, finance teams can decrease budgeting time from months to days. These efficiency benefits are obvious. However, there is another more important benefit of continuous budgeting – better accuracy and forecasting.

Have you ever driven a car by trying to predict road conditions and turns while only using the rear-view mirror to look at historic driving data? Of course not. Anyone who relies solely on the rear-view mirror would end up crashed into a pole. Yet, that’s the way budgeting works today: companies try to predict their future needs by relying on old data. Like in our car analogy, it makes much more sense to look forward, seeing the landscape in front of you and determining the route based on what you see, not where you came from.

With continuous budgeting, corporations can nix the unreliable predictions and instead make budgets based on real data and current market conditions. Because it’s easy to pull and evaluate information from the ERP, finance managers can bring current conditions to life and make budgeting decisions based on real-time business data, rather than year-old information.

So what’s stopping corporations from adopting the continuous budgeting model? Most often it’s inertia; the maddening phrase, “this is the way we’ve always done it.” It’s not that corporations deny the benefits of continuous budgeting, it’s that they are often loath to change things.

Another reason is that performance goals are often tied to budget adherence; managers are often rewarded for staying within their budget guidelines. However, establishing performance payments for achieving certain budget targets is sometimes contrary to the health of a business because it also drives managers to unnecessarily spend their budget dollars in their entirety – even if it’s not in the best interest of the company – just so they are allocated the same amount in subsequent years. Continuous budgeting stops this cycle.

CFOs and other finance executives should take a good hard look at their budgeting procedures and answer the question, “What’s stopping you from making your budgeting process more efficient and effective?”

Jon Louvar is the planning solutions manager at InsightSoftware.com.

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