One of the first things you learn in business school is that a detailed and realistic budget is one of the most important tools for running a business. This document is your North Star, providing the guidance you need to act with the resources available. Without budget planning, it can feel like you’re shooting in the dark.
In recent years, however, budgeting has lost its luster for a growing number of businesses. According to a 2017 survey by PWC, the majority of companies reported either ‘no link’ or a ‘weak link’ between the corporate strategy and the budget processes, suggesting there’s a huge disconnect between what a company needs its budget to achieve (strategy), and what it’s actually achieving (value). Managers also complained that completing an annual budget took too long and was too expensive. These are just some of the reasons why companies like Unilever have been abandoning their annual budgets, with no tears.
Now, the pendulum is swinging back in favor of rigorous budgeting. After months of improvising through the COVID pandemic, business leaders are recognizing that they need real budgets—and a much better budgeting process—to guide them through the coming year. Call it a sign of the times, literally.
With that in mind, here are three strategies to help you budget more flexibly and navigate through fast-changing times.
Most budgets use last year’s budget as a base, with adjustments built around what is needed for the upcoming period. Each department reviews its annual expenditures, and this sets the tone for their funding in the next budget. This is a quick and cost-effective way to build a budget—but sometimes it is necessary to take a step back and look at the key drivers for your business.
Especially in unpredictable economies, where both your spending activities and the reactions of competitors are changing, it’s worth performing a back-to-basics analysis of the products and markets that drive the company in order to create closer links between strategy and operations. The extreme method here is called zero-based budgeting. With this technique, every single line item must be justified for each new period, and every function within the business is analyzed for its needs and costs. Essentially, you start each period with a clean sheet.
Companies often balk at such a drastic method because it is so time consuming. But in the wake of COVID, the question facing leaders may not be how much to spend, but rather the more fundamental choice of where to spend. For instance, a company may cut its travel and entertainment budget (or even its real estate budget) to zero and reallocate the money to working-from-home.
You don’t have to go to the extremes of zero-based budgeting. But refocusing on your key business drivers is a chance to reset and stress-test your assumptions against what really matters. This can result in a much better prioritization of projects, better metrics, and a functional budget that’s much more in sync with business strategy.
Collating and syncing information across all the departments and cost centers in your business can be a monumental task. If you’re still relying on a proliferation of ad hoc reports and spreadsheets for your business insights, then you’re going to struggle. Even small errors can have a major impact on the allocation of resources in the budget.
Cloud-based corporate performance management (CPM) software can go a long way in making the budgeting process less time consuming and will improve your accuracy significantly. CPM tools are designed to integrate all your financial and non-financial data into a single version of the truth, and in real time, allowing for much more realistic budgeting than manual options. Doing the heavy lifting on the front end through tech means less work during subsequent budgets and can reduce budget variance dramatically.
Expert financial planning and analysis from an experienced advisor, combined with the latest digital tools, is the gold standard for making high-stakes budgeting and forecasting decisions. If you’re hiring an outsourced accounting team, make sure they offer FP&A.
Do you create your budgets before the start of each financial year, based on the numbers and economic situation at the time? Many businesses do this. But if there’s one thing 2020 has taught us, it’s that rigid budgets aren't very helpful. Things can change very quickly and continuing to base decisions on the ‘best guesses’ you made 6 or 12 months ago can lead to some faulty decision making that can be harmful to your business.
The best way to keep your budgeting flexible is to implement rolling forecasts based on actual results and revenues, not what a department head thought would happen a couple of quarters ago. With a rolling process, forecasts are made each quarter to improve the accuracy of your projections as they’re melded to these latest trends. The result is a better management of resources as you stay on top of any changes, good or bad, that could have consequences for your business.
Rolling forecasts also allow you to stress test many scenarios and pivot as needed based on any new data presented. So, all decisions are based on what's happening now and not on what happened the previous year.
The disruptions of COVID-19 are causing businesses to fundamentally rethink parts of their budget and the processes they use to create them. But it’s also an opportunity to look at expenses with fresh eyes, and with a tight focus on strategy. In our experience, this can only lead to more flexibility and control for your business.