Real Time Budget Management for Startups
Budget management can cost you more than just money. Use spend management software to manage your budgets in real-time.
We all know that poor budget management can harm companies of every size, but to what extent? Going over budget doesn't just hurt a business's bank statements; it can also damage morale and make success seem unattainable. Poor budget management costs more than you think.
What is budget management?
Budget management is the exercise of creating a strategy for how to spend your money over a certain period and then tracking spending to ensure that you stick to the plan. Businesses, organizations, households, and individuals rely on budget management to keep their finances in order.
Why is budget management important?
Budget management is important because it helps ensure you're dedicating enough funds to top priorities and not overspending on less critical things. When you make and stick to a budget, you're more likely to spend within your means. In a business setting, budget management helps ensure you don’t run out of money so that you can achieve your goals, like adding more team members or attracting investors.
What does budget management look like in most organizations?
The budget management process begins at the end of the fiscal year when stakeholders (departmental budget owners and finance team members) create the annual budget.
First, executives and finance team members look at the big picture. They figure out how much money the organization has to work with—the operating budget—based on cash flow forecasting, expenses, and other factors. Then, they decide how to distribute the budget among departments.
Next, departmental budget owners determine how to divide their allotment by time period (quarter, month, etc.) or by spending category (ex: marketing campaign, office supplies, etc.). Then, budget owners typically have to seek approval from the finance team for their budget plans.
When the fiscal year begins, employees spend the money that's been allocated to their teams. They're supposed to adhere to the budget for guidance on where and for what purpose they can spend company funds.
At the end of each month, employees scramble to submit expense reports. The finance team relies on these reports to see just how much of the budget was spent. Everything is revealed at the end of the month…. Or several days or weeks into the new month once all the missing receipts are tracked down.
Why this budget management process is broken
This traditional budgeting process that we all know and love (to hate) is broken for four reasons.
First, it doesn’t give you any visibility into your spending. With this process, you can’t keep track of how much your team is spending in real-time. Actual spend versus budgeted spend is a surprise until the end of the month. How can you be expected to stick to the budget if you don’t know how much money you have left?
Second, the expense report process is a waste of time. Processing expense reports and reimbursing staff for spending is tedious. Finance team members waste their precious time on tasks like these that they could instead automate with the help of software. When they process expense reports manually, they're left with little time for more critical initiatives.
Third, budget owners are at the mercy of finance’s monthly close process. It could take anywhere from days to weeks after month-end for finance to provide final reports and updated budgets. Budget owners don’t have a true picture of how they’re tracking until it’s too late to take meaningful action. They often have no option but to manually tracking their budgets in excel, which is hardly ever accurate due to accounting complexities and human error.
Finally, the budget management process gives an illusion of control. Budgets create a false sense of control but don't prevent employees from making purchases that are out of the scope of the spending plan. Out-of-policy spending can only be identified when expense reports are submitted for approval. By this point, the money is already long gone.
Costs of poor budget management
Poor budget management costs more than you think. These are some of the unexpected ways that not staying on budget impacts your organization:
Your team will feel like they’re not doing a good job if they’re constantly being chastised for overspending. Decreased morale, even if unrelated to job performance, will eventually begin to affect overall performance.
Inability to meet goals
If organizations are constantly overspending because of the problematic budget management process, they won’t have enough money to meet their goals. For example, you can plan to open a new office all you want, but if unintentional overspending drains your funds, you may have to reallocate funds from your real estate budget into other budgets to make up for overspending.
Inability to evaluate success
According to the Harvard Business Review, a budget fills several roles. One of its most crucial roles is evaluating performance. The budget serves as a baseline against which to measure success. If your budget doesn’t accurately represent what your organization is spending, then using it to evaluate performance is meaningless.
How do you effectively manage a budget then?
So, how can you effectively manage a budget? There are no secret budget management techniques. However, there are budget management tools that give you access to the data and controls that you need to operate successfully in real-time.
Spend management software lets you tie corporate cards to budgets, and assign vendors to budgets. For example, your marketing department could assign a $5,000 corporate card to be spent on Facebook ads.
When your company adopts virtual corporate credit cards and debit cards, it can eliminate the expense report process altogether. Spend management software that's virtual card-enabled gives you real-time visibility into spending, so you always know where your budget stands.
Why is budget management important?
It helps ensure you have enough funds to achieve your objectives and enables measurement of performance against expectations.
Why is the traditional budget management process broken?
- It doesn’t give you real-time visibility over your spending.
- The expense report process is a waste of time.
- Budget owners need to wait for finance’s monthly close process before receiving updated budgets.
- It doesn’t actually provide any protection against out-of-policy spending.
What are the effects of poor budget management?
Decreased team morale, insufficient funding to meet goals due to constant overspending, and the inability to evaluate success due to inaccurate and delayed reports.
How does spend management software help me stay on budget?
Finance can create budgets and allocate them to departments to track in real-time. You can get granular with your budgets—assign sub-budgets to teams, break down category spend by vendor, and assign each one a virtual credit card. And with the right software, you can eliminate the expense report process altogether.