Two popular budgeting tools are spreadsheets and budgeting software. Let’s look at the pros and cons of each.
59% of businesses in a 2019 Robert Half survey reported using Excel as their primary budgeting tool. It’s been a popular choice for decades.
Some pros of using spreadsheets to enter budgets include:
- Inexpensive: Most businesses have licenses to spreadsheets as part of a Microsoft or Google software suite. Basic versions are available for free. Using software for budgeting likely has no marginal cost for the software. The cost is the time needed to build the budget worksheets and a budgeting process that uses them.
- Less of a learning curve than budgeting software: Many people, especially those in management, have basic spreadsheet skills. Entering numbers into a spreadsheet form is fairly intuitive for them.
- Templates available on the internet: You don’t have to create budgeting worksheets from scratch if you choose to use spreadsheets. There are sites on the internet that offer free or paid templates.
- Fully customizable: Spreadsheets are literally blank pages (with gridlines) that you can build out in many different ways. You can use a large set of formulas for custom calculations.
- Integrates well with some business intelligence software: Spreadsheets can be easily imported into some business intelligence software, like Microsoft Power BI. That software allows advanced reporting features that aren’t built into spreadsheets.
Here are some cons of using spreadsheets for budget entry:
- Error-prone: Spreadsheets are notorious for formula errors. Formula errors include incorrect numbers embedded in formulas and incorrect calculations. It’s easy to have totals that don’t include all the numbers they should. Links break down between sheets and between files. People can inadvertently overwrite a formula when entering their budget unless the sheet has been properly protected.
- May not import well into other software: Spreadsheets may take some reformatting to be able to be imported into accounting systems or reporting systems. This process may take basic database data scrubbing and formatting skills. Some of these systems may already have a budgeting system they are tightly integrated with that takes less manipulation.
- Lacks many of the workflow capabilities of budgeting software: To restate John Donne’s famous quote, no budgeter is an island. Finance has to send the budget form to all the people who first enter budgets. Those people often need to have others approve those budgets. Some budgets need multiple approvals from different layers in the company. Spreadsheets don’t handle this routing and access as well as budgeting software. Budgeting software has built-in information security and user roles.
- Can’t handle large amounts of data: The budgets of some larger companies have massive amounts of entry information and calculations. Spreadsheets struggle with this versus the database structure of budgeting software.
Budgeting software is accessible to companies of all sizes. Companies that have only used spreadsheets in the past may want to consider budgeting software. Here are some pros of using budgeting software:
- Much of the setup and linking is done: New rows are automatically added to totals. New departments, products, or centers are easily added to the company totals. Some setup is still required, which I’ll explain later in the cons of budget software.
- Workflows for common projection methods: I explained ways to project numbers based on past numbers in an earlier lesson. Many of these projection methods are built into the software. If you’ve loaded information from past periods, the software can calculate the projection for you. For example, if you wanted the budget for an expense line to be the average monthly amount from last year, you can select that method from a menu. The software calculates the amount and fills it into the budget entry form.
- Less error-prone: Totals and projection formulas are built into the software, so they can’t be overwritten like in spreadsheets. The formulas in the software have been tested by the software company.
- Collaboration: Multiple people can work together on the budget at the same time. Most software allows users to enter comments, which helps other people create and review the budget.
- Easier to use for those who don’t know spreadsheets: Not everyone knows how to use spreadsheets. Budgeting software may be more intuitive for those people. The software also comes with help menus and training aids from the software company. Still, companies need to provide training to their users on how to use the software. They must know how the company set up the software and how it fits into the company’s budgeting process.
- Easy distribution to budget entry staff: An administrator sets up each user in the software. The user is assigned a role of entry, review, view only, etc. They can only see the centers and rows assigned to them. This setup can be done well before the budget is open for entry. The budget can be opened for entry by all users at once and also locked from editing at once by an administrator. Most budgeting software is cloud-based so that it can be accessed anywhere. It doesn’t require software installation on the user’s computer.
- Approval routing and locking: Budget software administrators can set up routing. Once the budget is entered by one person, they can submit it to another person for review and approval. That person can make edits and submit it further up through the company for review and approval. The budget for that center can be locked for further editing by a person once they send it for review.
- Software specific to your industry may be available: Every industry is unique. A manufacturing company may need strong inventory budgeting capabilities. A service company may want more project and staff budgeting capabilities. There may be software or modules specific to your industry. I used budgeting software that was specifically designed for banking when I worked for banks and credit unions.
- May integrate with your other systems: The software may allow for a file to be exported from it for import into a company’s other systems. The software may have built integrations to a company’s accounting software, dashboard software, enterprise resource planning (ERP), or business intelligence software. I used a banking budget system that was fully integrated with the software we used to project our balance sheet and net interest income.
- Can still export to spreadsheets for additional analysis: Budget software usually doesn’t allow the same freedom for modeling and analysis that you have in spreadsheets. For that modeling, you can export data from the software into spreadsheets. I worked at a company where we did this to do additional testing and reporting of the budget.
- Easier to aggregate or drill down into data: Budgets of centers can be aggregated into divisions or markets. All the centers are automatically added to the company totals. The software then allows reviewers to drill back down from those totals into the detail of the component centers.
- Audit logs: This may seem like a small benefit, but it’s been very valuable to me in the past. During budget compilation, the audit log tracks the original budget amounts and how they were adjusted at each step of review. During the year, a manager may think their budget is a different amount than what they see in their budget reports. That person or a budget software administrator can go into the audit logs to see if the manager’s original budget was changed by reviewers. A best practice is for reviewers to add comments to the budget line item when they change amounts. For example, the head of IT may change the number of computer purchases based on changes in budgeted staffing that occur late in the budget negotiations. Of course, that person should communicate the changes they make directly to the manager whose budget is impacted, not just in the comments.
While budgeting software provides many benefits, there are also cons to using budgeting software. They include the following:
- Some setup is required: No software will be ready to go when you first open it. You will need to enter or import your chart of accounts into it. The users, their roles (i.e., entry, review, view only, etc.), which accounts they can see, and which centers they can see will all need to be set up. The routing process for review also must be set up. This takes quite a bit of time when you first implement the software. Most of this setup can be carried forward from the prior year when using the budget software for the second and future years.
- User training on software and ongoing support: Employees will need to be trained on how to access and use the budgeting software. Expect a lot of calls for help with resetting passwords at the start of the budget season.
- More expensive: Unlike spreadsheets, there is a cost for the licenses to budgeting software. The good news is that the cost of basic budgeting software is accessible to many companies. Most software is sold as software-as-a-service (SAAS) with costs per user. These per-user costs are fairly low for basic systems. Small companies only need a few licenses to these basic systems. Larger companies may want to consider enterprise licenses and software with more functionality. These costs might be offset by efficiency and accuracy in the budget process.
- Not as customizable: Basic budgeting software has limits to the customization of the budget entry forms. The routing may be too simple for some companies. For example, the software may only allow the review to be routed to one person, while the company may need two or more people to review a center’s budget. Reporting may be very limited. You may need to export the budget data to a spreadsheet, business intelligence software, or a database to perform more advanced reporting.
- May need to “freeze” your chart of accounts during budgeting: I used a budgeting software in which we imported our chart of accounts from our accounting system at the beginning of the budgeting season. Months later, once the budget was (finally) approved, we exported the budget out of the budgeting software and imported it back into the accounting system. Adding or deleting accounts or centers to either system during those months could cause problems with this process.
Testing and Analyzing Budgets
The budget needs to be tested for accuracy during and after the entry process. Budgeting software may have built-in reporting to show how the budget compares to past actual amounts. Each budget user can see the past history for each budget line item, which can make their entry easier and more accurate.
Budgeting software may have on-demand reporting at the company level for high-level analysis. Software may also have validity checks for missing information to improve accuracy. What-if and scenario analysis may be much easier in budget software if it has the functionality.
Spreadsheets provide greater flexibility for analysis. It’s not uncommon to export data from the budgeting software to do additional analysis in spreadsheets. Companies may use spreadsheets for customized budget reports for senior management and the board.
Using spreadsheets for budget-to-actual reports allows fully customized formatting. However, any reporting in spreadsheets is error-prone, so more time is needed for review. Spreadsheets can also be time-intensive to distribute or publish.
You could create budget-to-actual reports in the budget system if you can export actual accounting information to the budgeting system. This may be the most compelling reason to use budgeting software for budget-to-actual reporting. Using budgeting software also helps managers remember how to use the budgeting software throughout the year and look to it as a business management tool.
To learn more about how to improve your budgeting process, check out my Better Budgeting course.
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