Budgeting 2×2

There are two inherent tensions when it comes to budgeting: compliance versus cooperation and people versus technology.

Tension 1: Compliance versus Cooperation

The first tension is whether the budget folks are there to help the budget holder/client/poor sod or to help the organization do things like constrain spending.  The best budget team does both with elegance.  The budget team says, you can’t do THAT but why not try to do THIS.  They see budget holders as clients even if sometimes they have to deliver bad news.

Tension 2: People versus Technology

Like most finance disciples, good budgeting needs technology.  Unlike accounting, budget information is messier because it includes both numeric information (typically structured) and narrative information (often unstructured).  When someone buys a widget there is an audit trail within the accounting system (e.g. purchase orders, invoices, receiving documents, journals).  When someone ASKS to buy a widget, the paper and approval trail often exists across multiple system (e.g. emails, memos, briefing notes, business cases, meeting minutes, etc.).

Just as importantly, a good budgeting system must have an extraordinary memory.  The system describes when a budget event was created and who/when/why it was updated, (not) approved and compares different versions of that approval.  Making this even more complicated is that this creation, updating and approving varies widely between organizations.  Thus an accounts payable system is pretty much one size fits all.  A budget system is typically a custom or bespoke build for each organization.

Budget teams must avoid the siren song of the system-silver-bullet.  No matter how good the technology, people are always waiting at the other end.  And we are back to our budget clients: organizational executives, board members, politicians, managers and the garden variety budget holder.

Putting it Together, a 2×2 Matrix

Combining these two dimensions leads to the following 2×2 matrix.

2x2 Budgeting

2×2 Budgeting

2×2 Tour – Porridge is Optional

The following are generalizations about the four quadrants including a Goldilocks assessment of ‘too little’, ‘too much’ and ‘just right’ of each corner.

Q1: Automation

  • Description: Technical and compliance focused quadrant.  Many of the monitoring functions are automated.
  • Too Much: There is little re-work of numbers and limited professional judgement on client budget/business problems.  Often found in government organizations.
  • Too Little: Compliance is done manually via spreadsheets or a sophisticated technical system is not understood by its users and as a result work arounds erode compliance.
  • Just Right: technology serves the business.  Very little re-work of budget information is needed and training and change management makes the system well-adopted and part of the furniture.  Large government organizations may benefit from this focus assuming that business and organizational needs are met through other means.

Q2: Training/Mentoring

  • Description: Compliance rules are well documented and explained to budget holders.  However there is limited automation of the budget processes.
  • Too Much: The business loses sight of budgeting as an aid to the organization rather than its raison d’être.  As a result, there are endless budget meetings, a well-trained staff but limited technological leverage of the results.
  • Too Little: Rules abound but with little context or explanation for their existence.  Alternatively rules are often ignored by the budget team.
  • Just Right: for smaller organizations, this maybe a Just-Right location.  Otherwise, there is good documentation about the budget system and excellent training on the reasons and importance of compliance.

Q3: Re-Engineering

  • Description: Technology is changing how the business is managing its planning process.  Through cooperation, it is being integrated and expanded to support business and organizational objectives.
  • Too Much: Controls within the processes and systems of the budget system are lost.  This is because cooperation has set aside the compliance functions or the technologies are not designed to support compliance.
  • Too Little: A loss of system support results in a highly cooperative manual process.  Alternatively, a budget system is implemented that does not meet the needs of the organization.
  • Just Right: for rapidly growing and dynamic organization, particularly those in the for-profit realm, this may be the ideal quadrant.

Q4: Art of Budgeting

  • Description: The budget team works with the organization to identify solutions to business and organizational objectives.  Alternatively, this is the ‘horse trading’ element of budgeting in which give and take result in a consensus driven budget.
  • Too Much: Ideas and possibilities fly with little assessment of their feasibility, costs, documentation or version history.  As a result, the organization quickly loses track on its promises and plans.
  • Too Little: The budget is presented in a rigid manner with little opportunity for discussion or negotiation.
  • Just Right: Every budget will go through this phase as it is presented to a board, legislature or executive team.  The Art of Budgeting is best served layered on the other .

How to Be Sure your Budget Team is Not Cornered

So which quadrant is optimal and which should be avoided?  The answer is two-part: What Type of Budget Shop Do you Have/Need and What Type of Problem is Being Addressed?  The ideal budget team/process is one that straddles all four quadrants with a modest focus where it makes sense.

In addition, different problems require different aspects of the matrix.  Collecting bottom up budget information is primarily a Q1: Automation problem.  Presenting to the board and negotiating trade offs between programs is a Q4: Art of Budgeting opportunity.

Hopefully the model can help you evaluate areas of strength or weakness with your current budget team and also decide where your focus should be within your organizational context.