Today, planning a corporate budget is more challenging than ever, as there is greater pressure on business than ever before.
With the fluctuating market, increased regulations, fickle consumers, and rapidly changing business models, managing business finances can present a lot of difficulties.
Why Is Budgeting Such a Challenge for Finance Today?
The challenges with budgeting are both internal and external. According to Lee Feingold, Senior Associate at the Keystone Group, forecasting and budgeting has always been a challenge. It’s time-consuming and presents a lot of cross-functional struggles, since you need multiple areas of business collaborating on the same budget. However, today it’s more challenging than ever due to the number of external stakeholders involved as a result of the increasing complexity of business.
What Are the Key Trends CFOs See in Budgeting?
One of the biggest trends CFOs see in budgeting is zero-based budgeting, which has been increasing in popularity among financial analysts. Rodger Howell, Principal at PwC, says there are a lot of discrepancies regarding how to make the best use of zero-based budgeting, but doing it every few years to gain a fresh look at the business can be helpful. Integrated business planning is another key trend, and it helps to tie the long-term financial plans to the operating model, so businesses can bring the capital, operational, and functional planning together. Rolling forecasts are also rising in popularity, as they provide a more agile method of budgeting that can be modified as circumstances change.
How Can Technology Help to Address and Improve Upon These Trends?
There has definitely been an increase in the number of businesses leveraging technology to improve their planning and forecasting. According to panelist Sherri Liao, Senior Director at The Hackett Group, the cloud has been a tremendous help in increasing user adoption of financial technologies. There are a variety of tools that can help to address cost and time to deploy, as well as tools to improve scenario modeling. The other beneficial aspect of financial technology is its ability to improve the visualization of data, which promotes accurate analysis and gives businesses a clearer view of their finances.
Warning Signs That Your Budget Process Isn’t Working as It Should
There are a lot of warning signs that can help businesses identify when their budgeting process is no longer working. According to Howell, one of the key warning signs to identify is the time that the budget cycle is taking. If a business feels the process is taking longer than it should, then they’re probably right, and it may be time for a change. If it’s taking too long, it’s indicative that the process isn’t well-managed, and technology can streamline the process. Liao added that the tendency for an annual budget to be updated numerous times can often indicate that something in the process isn’t working.
What Are the Identifying Factors of an Effective Budgeting Process?
While it’s important to identify red flags in a poorly functioning budget process, it’s equally important to take note when your budget process is effective. Liao says that target setting can be a key indicator. It can change the process of how budgets are carried out. By looking at the target setting to see how clear the objective is, it can help to manage the efficiency of the budget. Feingold says that it helps to take a top-down and bottom-up approach, where the CFO analyzes the numbers from previous years and conducts a top-down analysis based on major assumptions from the previous year. Then, the CFO should conduct a bottom-up analysis to see if there is a good alignment between the two.
How Does Data Quality Impact Budgeting?
Data quality plays a major role in successful budgeting, and businesses need to ensure high data quality to gain the most accurate results. In Feingold’s opinion, redundant data can negatively impact budgeting and skew the results. Untimely data can also impact successful budgeting. By the time the budget is completed, some data may already be out of date. When data isn’t at the right level of detail, it can create issues as well, so maintaining quality data is essential.
How Can CFOs Increase Budgeting Collaboration Between the Finance Team and Business Leaders?
Collaboration between the finance team and business leaders is essential for successful budgeting, but it can be a difficult process to achieve. Howell suggests that the CFO help to drive the corporate strategic planning process. Implementing a year-round ownership of budgets can be helpful, as it creates an organization-wide schedule to hold team members accountable.
Are Alternatives to Traditional Budgeting Helpful?
Traditional budgeting isn’t the only option for enterprises, and there are a lot of alternatives that can provide greater flexibility. Howell notes that many businesses use top-down high-level forecasting, as well as zero-based budgeting, which can help to gain a fresh perspective on the business budget. However, an interesting and helpful trend has been scenario planning, which can help businesses to understand the potential aftermath of a variety of business circumstances, so they can be more prepared for the future.
What Are Some Key Levers for CFOs to Employ to Improve Budgeting?
CFOs need to be thinking of strategies to improve the budgeting process. Feingold recommends that businesses keep the budget on their mind consistently throughout the year. This can be accomplished by putting together a weekly scorecard that every management meeting starts with. The scorecard will cover the key items impacting a budget to help everyone understand where the actual results are versus where the budget needs to be.
How to Increase Agility in Budgeting to Improve the Corporate Strategy
Agility is key to developing an effective corporate strategy. Feingold emphasizes that a weekly scorecard is essential to this aim, as it allows them to assess their goals and progress, so they can adjust more quickly when needed. Howell adds that simplifying data is essential. The data needs to be highly visual and easy to digest, so it can drive clear and evidence-based decision making.
Planning a corporate budget is no easy task, but there are a variety of ways that businesses can improve the efficiency and accuracy of their budget. With the right software tools, businesses can gain more agility in their financial budgeting by utilizing complex scenario planning. They can also break away from the traditional budget and explore more effective budgeting approaches, like driver-based rolling forecasts.
Learn about Zero Based Budgeting in the on-demand webinar, Beyond the Baseline: Best Practices in Zero-Based Budgeting.