August 11, 2019, 11:11 am / Management

What are the harms of overly detailed budgets?

How to simplify budget planning and at the same time increase its efficiency

Elena Mitrofanova , Chief Consultant, Financial Consulting Department, IBS

According to Hackett Best Practices, the world's largest companies use no more than 40 lines in their budgets. They plan only the main indicators. The budgets of Russian companies are overloaded with unnecessary details, but planning does not become more effective. The average number of items in the budget of a large Russian company reaches 300. Of these, 30 items relate to revenues, and 270 to expenses. The average nesting level of budget items is seven, according to IBS estimates. For example, expenses include the item of operating expenses, which, in turn, includes the costs of maintaining facilities, then - the maintenance of utility networks, and so on up to the seventh level - expenses for a specific service.

Such detailed planning is usually explained by the desire of the company management to control absolutely all indicators, including even those most insignificant items. Russian companies also tend to create many separate departments to control one or another area of activity: for example, a control department for an IT function or a security function. And corresponding additional items are introduced into the budget. Top management has the opinion that the more detailed budget items are disclosed, the more accurately the budget is formed and the better it will be executed. Practice shows that large-scale planning gives results no worse than detailed ones.

Despite the abundance of articles, many Russian companies are dissatisfied with the results of the budget process: according to 70% of IBS clients surveyed, budget indicators become outdated within a month after its adoption.

How to make quality decisions based on data

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According to Eli Schragenheim, an expert on the theory of constraints and management, planning in too much detail is as bad as having too much inventory.

In a constantly changing and crisis-prone economy, annual planning accuracy is approximately 70%. And budget execution is influenced by a small number of factors.

For example, the dollar exchange rate. If the exchange rate fluctuates strongly, revenue can change significantly, and an error in sales forecasting will ruin any budget plans. Costs must be planned in aggregate so that they can be easily recalculated.

Another disadvantage of detailed planning: if the company has information systems that monitor the compliance of expenditure items with specified limits, if these limits are exceeded, payments are automatically suspended. You can obtain authorization for payment - if there is an unexceeded limit for an item of a higher level or at the expense of another item. But making decisions and adjusting the budget will take time.

It must be taken into account that a large number of employees are involved in the budget campaign, and not only from financial and economic departments. According to an analytical report from Granfield University School and Accenture, 25,000 person-days per year are spent on planning and budgeting in a company with a capitalization of $1 billion.

A solution to the problem could be a transition to enlarged annual planning and detailed budget planning at the operational level.

Here are five steps to consolidating budget items:

1. Determine the desired level of detail. A three-level structure is optimal. For example, the first level is income, expenses, investments. The second level is the direction of expenses or income (operating expenses, income from core activities, other income). The third level is a group of expenses (for example, rent, maintenance of facilities, repairs, transport).

2. Get rid of articles that are below the selected levels. These are, as a rule, small items, the planning accuracy of which is usually low. For example, detailing the commission for banking services (for conversion, cash withdrawal, collection, wire transfers) is unnecessary.

3. Consolidate items that have been zero for two years.

4. Highlight those budget items that characterize the main activities of the company. Maintain the same high level of detail on them. And enlarge the articles that are not directly related to the main activity. For example, a trading company should detail income by sales method (retail, wholesale, online sales), by region, etc. But for other activities, the share of which in total income is insignificant, such detail is not needed.

5. Analyze the structure of articles based on the principle of materiality. Items that are insignificant and not related to core activities should be enlarged. For example, management wants to control in detail all income that constitutes more than 10% of a given item, and general business expenses - if they exceed 5% of the item. After analyzing all budget items, their list will be reduced by 30–40%.

At the same time, you need to focus on operational planning. Here, detail is justified: you already have accurate information, and the risk of wasting time is minimal. You should also pay attention to the quality of collection and analysis of reporting data. Let's return to the example about banking costs. Actual data (on commissions for conversion, cash issuance, collection, non-cash transfers) needs to be collected, analyzed and conclusions drawn - for example, about changing a bank, tariff, etc. But there is no point in planning these expenses in detail in the annual budget.

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