Previously we reviewed how you can structure your strategic budgeting process by translating your business’ goals into specific, measurable and achievable initiatives which allows your departmental leaders to plan ahead and fosters a culture of ownership. This month, we will review different budgeting methodologies that will help you identify and select the right process for your business. Once you have selected your budgeting methodology, it is essential that you implement a technology solution that will enable visibility, centralized governance, and keep you organized as each departmental business leader provides feedback throughout the process.
The highest priority budget for most companies is the operating budget. This budget contains revenue and expenses and is broken down into each revenue category or channel, including labor cost, benefits, and non-salary expenses. Once you have this information as the baseline, there are four methodologies you can utilize to build your budgeting process.
|o The budget is stable and change is gradual
o Managers can operate their departments on a consistent basis
o The system is relatively simple to operate and is not time-consuming
|o Assumes activities and methods of working will continue in the same way
o No incentive for developing new ideas
o No incentives to reduce costs
|o Identifies and qualifies goals and objectives while holding all departments accountable for the process
o Emphasizes achieving the organization’s goals and objectives and is integrated into the broader strategy
|o Encourages management to make decisions based solely on their business judgment
o Doesn’t always align expenses with the business activities required to achieve the revenue
o Can lend itself to qualitative debates among senior staff
|o Links every function and department with their spending and provides a complete picture of the business and clear accountability for expenses
o Takes into account each and every activity that incurs costs which can improve the bottom line
o Identifies any non-value-added activity
|o Takes a lot of time away for resources to come up with the budget
o Focuses on the tactical goal rather than the long-term strategy
o Not practical for every type of business – only those that can feasibly implement activity-based costing
|o Ensures that each department has the exact amount of resources and funds they need
o Helps management strongly understand the trade-offs between expenses and value when any event triggers a mid-year adjustment (e.g. COVID)
o Establishes a strong tie between the way money is spent and the overall strategy
o Allows for the identification and elimination of expenses that don’t add value
o Eliminates arbitrary usage of expense budget amounts
|o Demands more time and attention from management each year
o More difficult to account for strategic investments geared towards innovation
o Creates additional effort when revising forecasts during a budget cycle
Regardless of the budgeting methodology that you select for your business, it is extremely important that you give yourself enough time to develop it prior to the following year (typically 3 to 6 months). In addition, obtaining feedback and realistic inputs from departmental leaders is what will allow you to drive performance and motivation, and get your employees to buy into the plan.
Most companies have experienced siloed and manual processes outside of the system because today’s technology systems do not provide a one-size-fits-all solution that business users are looking for. The reality is that systems feeding into unstructured excel spreadsheets are still often accepted for corporate planning and budgeting processes. Corporate Performance Management (CPM) solutions like Prophix can normalize and monitor data from various sources to create structured models with pre-defined reports, templates, and business logic.
Each one of these budgeting scenarios has the ability to shape the data across different types of accounts, departments, legal entities, and reporting currencies, allowing business users flexibility while improving forecasting accuracy. The right technology will allow business leaders to worry about the business scenarios more than the budgeting process itself.
Some examples include:
Clients who monitor and manage their budgeting process with a technology solution obtain real-time updates through dashboards and reports that provide the level of detail needed to run their operations. Please see the examples of end user dashboards and reports below:
Now that you have a better understanding of different budgeting methods and what the technology can do for you, you will be able to accelerate your budgeting process while driving transparency and accountability.
Our Rapid Reporting & Analytics Improvements services take 2-4 weeks. At the conclusion of the project, you will have a detailed financial analysis of your company including financial, operating and leverage ratios, comparison of your company’s performance to industry standards, a list of recommendations and a roadmap for execution, and examples of financial reports tailored to your company and its operations.