Building an Annual Budget — Is Excel the Right Tool for You?

Excel is an excellent tool for building and maintaining calculations and for putting business plans together quickly. In a complex business environment, however, that same flexibility can become an obstacle in the planning and budgeting process.

What makes a good budget?

1. A budget is a management tool

Planning and building a budget says a great deal about how professionally a company is run. The budget should improve the way the organisation operates, which means several people have to be involved in creating it. Sales planning needs input from the people who know the products and the customers. A production plan needs input from the people who understand production capacity and raw material requirements.

The budget is meant to be a working management tool that flexes with a changing reality. That calls for an efficient process — one that does not consume too much time or too many resources.

2. Accuracy and working assumptions

Accuracy is a large part of a high-quality budgeting process. Managers across the company need to be able to rely on the assumptions the budget was built on. Those assumptions have to be accurate enough to reflect reality; otherwise they can distort the company’s own objectives.

3. Workflow matters

It is important that the people who know the business are involved in the planning process. The tool should allow access on a “need to know” basis and reflect the company’s working procedures. Good tools make it possible to track who did what and when, and to move data easily into other systems.

Does Excel meet these criteria?

1. Excel files are documents, not databases

Excel is not a database. Excel workbooks are documents stored in folders. A user can accidentally change or delete important information. Once people start copying files and making local changes, you end up with a confusing tangle of different versions.

2. Errors in the budget files

Anyone who has worked with a complex Excel model knows the scenario: everything looks fine, but the final number makes no sense. Errors in a large spreadsheet take a long time to track down and fix, particularly when several files are linked to one another.

3. A good budget has many levels and dimensions

A complex budget rests on a large number of underlying assumptions. Excel does not let you work with many levels and dimensions at the same time.

4. Flexibility to change

When you add a new line item or a new department, adapting the structure of the spreadsheet takes real effort. A decision to acquire a new company can end up being dropped from the plan simply because the software is not flexible enough.

5. The company as a body of knowledge

No single employee or manager holds all the answers. Sales managers know the customers, marketing managers understand the brand, production managers understand the processes. So why should the finance department alone be responsible for the entire budget?

Summary

Planning and building a budget does not have to be a tedious task carried out once a year. A budget can be an excellent tool for running the business. That said, it is worth thinking seriously about whether Excel is the right tool for the job.