For many companies budget season is right around the corner. Summer is the best time to reflect on lessons learned from past budget cycles and explore ways to anticipate the upcoming season with less pain and more value add. If the phrase “stale budget numbers” resonates in your organization, you may want to integrate these practices in your next budget cycle:
- Align top-down strategic objectives withbottom- up planning reflecting a true commitment to planning excellence. The FP&A (Financial Planning & Analysis) group plays a leadership role in communicating corporate strategies to department managers and ensuring operational plans align with strategic goals. By combining both practices companies can track performance against plan with meaningful data and metrics.
- Build your budget based on fundamental business drivers to ensure consistency across functions and promote planning coordination between functions. Focus on material content in budgeting so that managers can focus on the business drivers that significantly impact expenses, revenues, capital and cash flow. World-class companies average 15 to 40 line items in their budgets. Build your budget based on fundamental business drivers to ensure consistency across functions and promote planning coordination between functions. A complex model might not have any more precision than a simpler model. More detail and intricate calculations can lure managers into the trap of thinking their plan is more accurate but added value is often debatable.
- Assemble a detailed list of all proposed projects from departments with major expenditures such as IT and R&D. Then categorize the projects, gauge dependency of each project and prioritize the projects. While most projects are expected to increase sales or reduce costs, they may also require unexpected changes across company-wide processes and systems. This exercise will help an organization assess the dependencies of each initiative and determine the impact of variation between variables.
- Create a waterfall schedule to track your forecast accuracy. A waterfall creates an environment of accountability and allows executives to determine key trends.
- The most impactful shift in budget planning is not to budget at all! Fast growing companies need to be as nimble as possible to face multiple market pressures. Frequent re-forecasting and rolling forecasts will facilitate more informed decision-making in areas such as pricing changes, product line changes, capital allocations and organizational changes. The forecast horizon should be a minimum of rolling four quarters and up to eight quarters. Budget scan simply be a snapshot of a particular forecast version for standard setting purposes such as bonus or profit sharing pla nning in a fiscal year.
Implementing these best practices compels:
- Senior management to support the budget cycle because operational and strategic goals become aligned;
- Department managers to meet these budgets because they initially created them and will be rewarded for meeting them; and,
- FP&A to drive further value through productive and collaborative effort.
For more practical tips to a smoother budget season contact us at firstname.lastname@example.org or 650.587.5199.