It’s that time of year. The Halloween decorations have been put away. Stores are lined with wreaths, garlands, and lights and filled with toys, with Christmas music playing. It can only mean one thing: It’s planning season.
November is traditionally the kickoff of planning season. And what starts as a casual planning exercise typically gets frenetic as January draws closer and the budget is due.
The Problems with Typical Approaches to Budgeting
The most common annual budget takes an incremental approach. Typically, it’s some variation of, “take last year’s budget and add/subtract 10%,” depending on whether the company is trying to grow a little or tighten its belt. While it’s a speedier way to assemble a budget, it doesn’t align the way a company spends to its goals.
Newer methods have attempted to improve and modernize the process. Zero-based budgeting starts from scratch to build a budget to meet the company’s goals without regard to the prior year’s budget or spending. While good in theory, the process often breaks down and teams revert to the prior year’s budget, plus or minus a few percent.
Another modern twist is a rolling budget, where budgets are revisited more frequently, usually quarterly. When done well, this approach can allow more flexibility, particularly when the business environment is changing. But it can also lead to rolling forward misaligned spending from previous periods.
The inherent problem? Spend inertia
The problem with most methods is what our controller Brian Maslen calls spend inertia. What was spent before becomes embedded in future budgets. Managers fail to ask whether they continue to get value from that contract or this subscription, and so spending patterns become ingrained. Waste goes undetected and compounds when it continues in budgets that grow over time.
What is spend inertia? It is the development of spending patterns that continue even though the return on that investment is no longer there—the spend just keeps happening because that’s what’s been done in the past.
Every dollar an organization spends is an investment that should deliver some kind of return for the company. Nobody wants to see money wasted.
Center can help companies navigate budget season to build a solid budget everyone can agree on. Here are three best practices to work into your process:
1. Start with Accurate Data
Don’t rely on old invoices
In a previous role I was charged with putting my team’s multimillion-dollar annual marketing budget together. Between events, programs, and contracted resources, there were a lot of moving parts. Even though we used expense management software, as a manager I didn’t have access to the historical data, so my team pored over old emails to find invoices to put together estimates. By mid-December, we had the budget locked and approved.
Unfortunately, one invoice we used to estimate costs was for six months, not a full year, so we ended up being 50 percent short on one of our major line items. Going back to ask for more money wasn’t an option, so we had to either go without that program for half of the year or scale back spending in other areas. Not catching that mistake put us way behind on achieving our targets for the year.
Go to the system of record to build your budget
Searching through emails and reviewing old invoices is cumbersome and often leads to mistakes and inaccurate budgets. Your expense management system, together with your ERP, should be the source of truth for historical costs so you can get an accurate view of what has been spent and create more precise budgets. If my team had been using Center, I would have seen all the costs, not just a six-month invoice—and we wouldn’t have made the same mistake.
Use the most recent data available
With the uncertainty in the economy and fears of inflation, recent data from the last quarter or even last month may be a better predictor of what you need to budget for next year. For example, hotel prices have jumped 17% this year, and materials like lumber have increased by more than 100%. Using and adjusting recent data can help you more accurately predict future business needs and costs.
2. Track Your Data Based on the Dimensions that Matter
Every organization tracks expenses a little differently. Department, cost center, and expense type are common classifications. Some businesses track job, project, and client-related expenses. Others track multiple business lines, divisions, or entities. No matter which categories you use, having expenses tagged properly can accelerate your budgeting process and lead to fewer errors.
Simplify data entry
Your expense system should hit the “easy button” for spenders and your accounting team. It should offer the power and flexibility to track expenses your way without creating a burden for your staff.
Center’s Customizable Policy Controls empower organizations to track the dimensions that are important to them. We design around a number of best practices:
- Making it easy for employees to get expense fields right the first time by only asking for the information that’s needed.
- Not surfacing irrelevant fields, like the “client” field for non-customer-facing roles.
- Limiting the options within a field so employees can’t accidentally select the wrong option. If a supervisor oversees only a handful of projects, we don’t display all 800 project codes.
- Using AI and machine learning to reduce the tagging burden on employees and improve accuracy. Center uses a proprietary algorithm to analyze past spending behavior and predict the right expense type category, saving employees time and reducing mistakes.
- Building a flexible system that can adapt to your changing business needs, such as adding new projects or divisions. We believe you should be able to make changes yourself, easily, without requiring expensive professional services or needing to take a coding class.
3. Review Budgets vs. Actuals Frequently Using Fresh Data
Avoid outdated data
Most expense management solutions are built on the concept of a monthly expense report. After the end of the month, employees go back through all their expenses, tag them, scan receipts, and submit their reports. The issue is that your expense system and ERP are at least a month behind, if not more.
The implication to your business is that you don’t know if your expenses are on track, too low, or too high for at least a month. If you’re not tracking to your budget, it’s too late to course correct.
Aim for real-time visibility into expenses
The best practice here is to get real-time visibility into expenses so you always know what your employees are spending money on. Knowing where you stand mid-month will empower your team to make adjustments so you stay on track with your budget. Using a solution like Center can reduce budget variances to under 1%.
Want to see how Center can help your organization streamline expensing and facilitate a streamlined budgeting process? Sign up for a personalized demo.