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A budget is necessary to set targets and goals across the business. It aligns the organization on a one team, one P&L mindset, where everyone is working towards a well-defined, common set of objectives. The problem for many organizations is that it takes far too long to develop a budget that is inevitably obsolete within a couple of months of the subsequent year.
The Achilles’ heel of an annual budget is the lack of a monthly planning process. A monthly planning and forecasting process provides finance as well as budget owners the repetitions they need to collaborate, iterate, and refine. Ideally, you want your budget process to be a sprint, not a marathon battle.
56% of companies spend three months or more on their budget process
The budget is meant to force decisions, which can be delayed at both small and large enterprises for different reasons. Some larger, more established private enterprises may only make a select choice of strategic decisions annually, to not disrupt the status quo. The budget acts as a definitive decision-making framework executives and department heads must engage with and not punt on like other plans.
In contrast, Early-stage companies might only track expenses and set high-level revenue targets, but do not budget at the department level. Often the reason to budget is reactionary to an event such as raising a round of funding or preparing for a transaction.
These are monumental occasions for any organization; however, a reactive budgeting approach or waiting too long to start an annual budget not only leads to overspending but leaves enterprise value on the table that could otherwise net a higher valuation.
Firms want to invest in companies that have a solid finance foundation, where they can focus resources on go-to-market, development, and potential mergers and acquisitions, instead of making sense of the company’s finance and accounting operations.
Budgets also allow budget owners and those managing P&Ls to examine their department and teams at both an aggregated and detailed level. Intuitively, these budget owners must substantiate their headcount plans, define roles, and expense utilizations. This process breeds a finance-first mentality across the organization, allowing even a smaller enterprise to operate like a more mature function.
As we mentioned, over half the companies surveyed spend three or more months on their budget process. A budget should not be the bane of every finance professional’s existence, nor a rite of passage. It should not be an excruciating finance exercise consisting of multi-spreadsheet wrangling.
Committing resources to over a quarter of the calendar year is far from ideal. Much of this time is spent on back-and-forth email threads, spreadsheet cleansing, and inquiries for clarification, all of which are resource drains.
“I can’t wait for budget season to start. It's something I look forward to each year.” – No finance professional ever
If your budget is best described as an organization-wide scramble that takes valuable bandwidth away from strategic analysis and decision making due to months of back-and-forth and role uncertainty, there is substantial room for improvement.
Zero-based budgeting: requires you to determine how you will allocate each dollar for a given year (assuming it's an annual budget). You essentially start with zero each year and decide, with input from management and budget owners, how you are going to spend any dollar.
Driver-based budgeting: based on the lever, activities, and resources driving performance.
Top-down budgeting: involves input from senior management and the executive team to set and pass down targets to departments.
Bottoms-up budgeting: requires Finance to collect the individual targets from the department heads and build up from there.
Each of these types of budget processes have its advantages but also present several challenges and limitations. Zero-based budgeting can be extremely time-consuming, as every single dollar spent needs to be examined and approved. We certainly advocate for detailed planning, in fact we provide data extraction tools for this purpose, but we would expect to assume necessary expenses like office internet.
Driver-based budgeting is a preferred method, though it requires a deeper understanding of the business, how a department and business unit functions, and their operating activities. Much of this knowledge is only understood within a business unit and therefore requires their department head’s feedback and input to properly integrate.
With top-down budgeting, the executive team almost always underestimates the number of resources required for business units to operate. Conversely, bottom-up budgeting often leads to budget owners requesting far too many expenses and unnecessary headcount additions.
Since these processes offer some value one way or another, a hybrid budgeting approach combining all of the elements is ideal.
There are four primary reasons annual, distributed budgets benefit from monthly forecasting. A detailed monthly forecasting process should:
1) Build organizational muscle memory to help produce budgets efficiently. It’s a collaborative process for the team to refine and hone.
2) Empower finance to work directly with budget owners on an ongoing basis to create cross-functional synergy and better understand nuances of a business unit.
3) Set the framework for the budget and achievable, realistic target setting.
4) Define each person’s role, their specific responsibilities, and promote accountability from top to bottom within the organizational structure.
In many cases, companies don’t adopt monthly forecasting because they interpret the process as cumbersome. This is typically due to a lack of resources and process knowledge to curate quickly, yet effectively.
Let’s face it, we all love Excel for its many benefits to produce reports, build models, and fulfill ad-hoc requests from business partners. However, the almighty spreadsheet has its limitations. For one, trying to connect multiple systems and data sets requires a herculean effort of transformations, constant manual updates, and manual reconciliations. Not to mention erroneous errors go unnoticed for far too long.
Purpose-built budgeting tools and platforms, like the FutureView Platform, structures and standardizes data across various systems, so both your financial and operational data is preprocessed, and structured to slice-and-dice in various ways.
It also enables real-time collaboration and controlled access for budget owners to work within only their P&L and department details, while finance and executive teams can administer at the aggregated company level.
72% of CFOs wish to improve the flexibility of budgeting and forecasting through technology - Gartner Finance Trends Survey
It’s worth noting these tools are meant to compliment, not necessarily replace Excel. They free up valuable capacity for finance to be more strategic business partners during the annual budget process.
If your annual planning process takes three or more months, is a manual spreadsheet exercise, and produces little actionable insights, contact us to learn more about our FP&A Solutions and how our team can rapidly transform your budgeting and planning process from set up to finish.
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