What to Look for in Your Next Budgeting System

Sooner or later, you're going to need new budgeting software. Here are some guidelines for picking a system.
Jennifer CaplanJuly 9, 2001

Rolling up tens or hundreds of spreadsheets into one master budget can make the budgeting and planning process painfully time-consuming and error-prone. Because it is usually done once a year, by the time the budget is finally nailed down, it can quickly become outdated.

According to Dan Sholler, senior program director with market research firm Meta Group, companies that use rudimentary budgeting technology can take up to six months to complete a budget. “By that time, the market may have changed, you may have introduced new products, and you may have new competition in certain areas,” he says.

To simplify this grueling process and to make it more accurate, many companies have turned to budgeting and planning software, but vendor offerings are diverse, defying easy categorization. That can make it tough to choose the right product.

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Sholler contends that products should be chosen based on the different features they offer, which ultimately depends on an individual company’s priorities.

Analysts say, however, that as a general rule of thumb, companies should look for products that allow them to make their budget process dynamic and flexible. Generally, good budgeting applications should allow users to incorporate actual data with projection assumptions that can be tracked and altered as business conditions change.

“Budget metrics are not terribly valuable,” says Sholler, “unless they are both dynamic, meaning that they can be changed as business conditions change, and can be easily tied to other metrics by which the business is run.”

But regardless of a company’s specific needs, analysts generally agree that there are certain functionalities that all good budgeting and planning software should possess.

There’s no guarantee that selecting a budgeting and planning application will be painless, but following some logical guidelines can take some of the sting out of the process.

The best budgeting tools, for example, are browser-based, says Paul Hamerman, research director at Giga Information Group. Because browser-based applications do not need to be installed in PCs, they allow more people to get involved in the budgeting process, thus making it more dynamic.

“Web-based applications allow for bottom-up and top-down forecasting, and provide real-time input from the field as events happen and situations change,” Hamerman comments. A salesperson could use a planning tool to update his pipeline, for example. “If the probabilities on a deal change, then that should be reflected in the forecasts,” he says.

Good budgeting tools also provide an easy way to roll up budgets to the macro level and associate them with corporate financial metrics, and to roll the budget down into a more detailed level for the use of the individual operational managers.

“If I’m a production manager at a plant, for example, and I am being held to a particular cost number, then I need to know how that cost number breaks down into the metrics by which I run the plant — daily volume, inventory on hand, and supply on hand,” Sholler explains.

A budgeting application should allow users to easily revise budget targets and to quickly determine how those revisions will affect overall corporate performance, says Sholler.

Budgeting applications should also make it easy to consolidate numbers on the fly, says Raja Kochar, director of the business intelligence group at Answerthink, a technology consulting firm. “If you make a change, you should not have to wait until the next day, when the system finally processes that change, to find out what your numbers will end up being.”

Cutting-edge budgeting tools also allow for a large degree of flexibility for creating formulas, and allowing users to analyze numbers across multiple dimensions.

“You want to be able to manipulate numbers in multiple prices and costs across product lines and geographical regions, for example,” Kochar says.

Another important feature is the ability to integrate budgeting and planning applications with other business software, and import and export data from multiple applications across the enterprise.

“The key linkage is to corporate finance,” says Sholler, although integration with supply-chain management, enterprise-resource management, and customer-relationship management software can also be important.

“One of the constraints you might want to enforce, for example, is that sales and marketing expenses remain at 23 percent of projected sales,” Sholler explains. “You can either roughly estimate projected sales, or determine that number by accessing the sales pipeline information that exists in your Siebel application.” Integration is a key feature for making the budgeting process more dynamic.

Kochar says that being able to come up with projections under different scenarios is also an important feature, which is most effective if the budgeting application can be easily integrated with other business applications.

“The tool should be able to tell me how my numbers will be affected if something changes,” he says. “It should also be able to tell me, for example, ‘this is the level of EBITDA I have given to the analysts, now how can I work toward that number?’ “

Strong budgeting tools also have an online analytical processing (OLAP) component.

“You want a budgeting tool that allows you to tie and compare budget assumptions with strategic goals and historical business performance,” says Sholler.

Answerthink’s Kochar, however, contends that companies that already have an analytics tool installed on the database, in which they plan to house their budgeting and planning application, do not need to purchase a budgeting product with an analytics component.

Workflow functionality, which allows a finance executive to determine at a glance who has and who hasn’t yet submitted a budget, and alerts the executive when someone’s numbers are out of line, can also be an important component of a budgeting application, says Kochar.

“This is particularly important for larger organizations with more than a few hundred people,” Kochar comments. “Small firms can manage this process internally.”

A good budgeting system will also offer a convenient method of what Sholler calls “unitization.” The data that gets keyed into an Excel spreadsheet, for example, is usually in dollar amounts, he says, which presents a problem at the departmental level.

Sholler asks: “If I’m the manager of a warehouse in Topeka, the question is how many dollars do I put in to represent the value of my staff? I want to be able to enter that I have eight stock clerks, and then have the budgeting system figure out how to translate that into dollars, based on all sorts of information, from HR, for example.”

Sholler also says security is crucial.

Kochar says, “A good budgeting application should allow you to classify certain data as ‘no access’, ‘view only,’ or ‘all access.’ It should also allow you to lock the actuals. If a number has already been posted in the general ledger, then no one should be able to change that number.”

Financial executives should also make sure that there are no back-door entries into the database that would allow unauthorized users to alter data in the tool.

Given that so many corporations are moving their financial tasks to the Web, some users may find it useful if their budgeting system has a portal front end. This allows users to personalize the tool depending on their role within the organization, adds Kochar.

Portals tell users, for instance, whether or not they are meeting the goals they established during the budgeting process, and allow them to make changes accordingly. They also allow users to save cheat sheets, and make notes on the side with their justification for certain numbers.

Although the above features are essential for most companies considering a budgeting application, there are a variety of other needs-based functionalities these tools can provide, Kochar says.

Some tools, for example, support phased-in pricing on a weekly or monthly basis, rather than using a constant price scheme throughout the entire year, which can be very useful for some companies. Tools for a multinational company should be able to support multiple currencies.

Will following the suggestions above guarantee that financial executives can sail through the choice and installation of a new budget system without any pain at all? Of course not. But like any important technology selection, a little bit of due diligence early in the game can save you a lot of headaches later on.