While most large companies have already liberated their budgeting process from spreadsheets, many small and medium-sized businesses (SMBs) 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 in budgeting—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 would 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.”

This article will outline the problems associated with spreadsheet-based budgeting as well as the advantages of new technologies designed to automate the process and ensure greater accuracy. It also offers a step-by-step guide to help start the transition of your budgeting from a spreadsheet platform to an enterprise packaged application. The goal is to help SMBs plan their transition to a budgeting solution that delivers more collaboration but with more control, accountability and budget compliance.

Challenges Confronted by the SMB Finance Professional

CFOs and those who work for them face unrelenting pressure to align operations and strategy, deliver accurate and timely financial information, and monitor progress toward goals. Unlike the Fortune 1000, with greater resources and tolerance for risk, or the small office/home office (SOHO) business with its greater agility, mid-market companies are stuck in the middle. The challenges their executives confront are different. They must struggle with increased competition from global suppliers and buyers, shortened business cycles, uncertain access to capital and increased regulation—all with limited support and fewer resources. Time is their greatest constraint.

Consequently, the finance professionals in an SMB need business tools that help them quickly evaluate current and past performance against a predefined set of performance data (goals and forecasts), present clear facts and uncover trends. These managers demand accurate, timely data that can be easily updated as business conditions change.

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 practices in budgeting entail 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 can become 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.

12 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.Executives can’t answer the following questions: Who are my most profitable customers? What managers are the most productive? What product line is most profitable? Why are certain metrics “out of sync”?

4.Financial statements are not fully integrated because they are too time-consuming to set up or the model was modified too many times to ensure no errors.

5.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.

6.Budget calculations become too complex for most budget preparers to follow, and the model gets too large for users to assimilate.

7.It takes more time to manage and maintain the spreadsheet than to perform the actual analysis and planning.

8.The budgeting models break frequently with changes to data structure or roll-ups.

9.There are data integrity issues—mistyped data, broken formulas, missing links, logic errors—that make budget models unreliable.

10.Comparing current year actual results to plan and/or last year’s actual results is a manual, cut-and-paste exercise that takes too much time, invites errors and slows down month-end analysis and reporting. Summary or high-level variance analysis lacks underlying detail.

11.It’s difficult to accurately track payroll, taxes and benefits expenditures for all employees, including contract, part-time and seasonal workers, resulting in over-budgeting for payroll taxes such as FICA or underestimating total employee costs impacting year-end cash flow.

12.Deferred revenue projections (for projects, maintenance contracts, royalties, renewals, subscriptions, etc.) are too complex to model, requiring the layering of multiple revenue schedules within multiple periods to create the waterfall effect.

Benefits of Budgeting with a Packaged Application

An attractive solution for replacing the spreadsheet is the use of innovative technology solutions designed to automate the budgeting process, allowing your financial leaders the freedom to focus on more strategic initiatives and feel confident in the financial future of their organization. By automating the process, financial leaders can anticipate the following key benefits:

Greater accuracy—Formulas for your models are based upon your assumptions and workflow, utilizing built-in financial intelligence and business rules to ensure complete accuracy.

Centralized database—Any changes to estimates or assumptions are automatically updated in real-time so everyone is working with a single version of the truth.

An easier-to-use common interface—Applications are built from the business perspective to maintain consistency with business entity names rather than database conventions.

Accounting application integration—Automated processes will import data from commonly used accounting applications, with the ability to support a rolled-up budget and forecast from multiple systems. This expedites data transfer and minimizes errors.

Reduced programming—By eliminating the need for spreadsheet-type formulas, and therefore errors, your budget and forecasting model can become an accurate reflection of your business.

Contingency planning and sensitivity analysis with “what if” scenario generation—Users can change variables to see their immediate effect on outcomes. A series of models can be replicated, enabling additional analysis and comparisons.

Integrated reporting—Generate profit/loss, balance sheet and cash flow statements automatically, which can be customized to your needs.

Collaboration—Involvement and collaboration by more end users and contributors to the budget process.

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.

• Create the vision. Project the ideal vision of your budgeting process, including who would participate, what integration would be helpful, which general ledger or other transactional systems your budget should link to, and the reporting needed.

• Conduct user analysis. What kinds of users today take part in your budgeting process, who is missing, and who are the people you want to draw in? By documenting their needs, you can set the stage for a good level of user acceptance of the budgeting application.

• Secure high-level executive sponsorship and ensure that you will have sufficient project justification and funding.

Conduct Due Diligence

The primary benefit of graduating from pure spreadsheet budgeting to an automated process based on innovative technology solutions, 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 organization will likely depend upon this system as part of standard operations for a five-to-ten-year period. Conducting the necessary due diligence to explore all options is a worthwhile investment.

John Orlando is executive vice president and CFO of Centage Corp., a provider of automated, budgeting and planning software solutions for small to medium-sized organizations. He has more than 25 years experience in finance, accounting and administration, working with both high growth Fortune 500 companies and startup business. Prior to Centage, he served as group director of planning & analysis at WearGuard (subsidiary of ARAMARK), where he was instrumental in driving profitability via restructuring, cost containment and margin improvement initiatives. He holds a bachelors degree in accounting from Northeastern University and an MBA from New Hampshire College.