Budgeting is one of the most important recurring processes in any company, but every year it somehow surprises people across all company levels. Internal planning processes often get delayed because there are always other priorities.
In a survey by APQC, 63% of CFOs said that they are not happy with budgeting processes in their organizations. After 2020, the need for new approaches in budgeting is more obvious than ever before.
If you are already budgeting annually, but you feel like you can do better, here are 5 ways you can improve budgeting and forecasting processes across your company.
1. Define the rules and responsibilities
Set clear expectations, deadlines, and roles for the budgeting process. Communicate specific top-down targets across all levels of your company (for example, maximum salary increase cannot exceed last year's by more than 4%). When all stakeholders are on the same page, some problems can be avoided altogether. That way department heads can get better feedback from their teams, pass it on upwards, and vice versa. The easiest way to build a plan and communicate it properly is to create a workflow diagram with milestones, approval steps, and deadlines, for the entire organization to review. You can use specialized software for that, but sometimes, even pen and paper will do.
2. Leverage Zero-based budgeting
With zero-based budgeting, you need to justify every expense before adding it to the official budget. The goal is to reduce spending by looking at where costs can be cut. Budgeting from scratch every year can seem like a crazy idea at first. It can seem too expensive, and even too radical to undertake regularly, especially for companies in some of the traditional, less dynamic industries. As of 2020, though, we're all aware that we need to be able to shift focus more effectively. Cutting departmental costs and freeing up cash for reinvestment can save companies in the post-COVID-19 era. But be careful here, you shouldn’t cut costs with clear and fast ROI (projects that will increase revenue, lower other costs, and save company time).
When properly implemented, ZBB can reduce costs by 25% in six months. The main objection for ZBB was that it is overwhelming and that it stops the company from doing anything else. Considering the democratization of cloud-based software solutions, this argument falls short. Especially after 2020, when we saw many successful examples of digital transformation.
SOURCE: McKinsey
3. Stay flexible - hold back some spending centrally
Whatever budgeting method you practice, you should stay flexible, and be ready for re-allocations as often as needed. Annually fixed budgets are not a good idea in the post-COVID-19 era. Research shows that, even before the recent crises, top performing companies were re-allocating resources across the business more than the less successful ones. One way to get there is to hold back around 10-15% of the total budget centrally. This will enable you to react swiftly when unexpected opportunities arise (creating new business models for example) and give you a contingency for supporting some of the variable-cost spending categories and capital expenditures. Also, it is widely known that in some enterprises, departments try to burn through their yearly budgets at any cost (literally), fearing that next year they won't get as much if they don't spend everything. If you are aiming for more transparency and better teamwork in your organization, you should put an end to these archaic practices.
Smart saving alone won’t get you to unicorn status but it’s never a bad idea.
4. Don’t rely on spreadsheets only
95% of companies manage their budgets using Excel templates and spreadsheets as their main tool. They ARE practically free and easy to use, but in the long run, they can cost the company more than it can afford. Managing budgets in spreadsheets is painfully slow and inefficient, and riddled with errors. Collecting and compiling the data using spreadsheets can seem like an exercise in futility because sometimes it takes months to do it properly. By the time you are finished, something has changed, so you have to start all over again. Huge amounts of administrative time, degradation of data, and overall lack of confidence in the process are practically a given. Luckily, the new generation of SaaS budgeting platforms and software solutions are becoming more affordable. They require no additional coding to implement and are significantly easier to onboard and customize to specific needs and business scenarios.
Too many companies still rely on spreadsheets as a main budgeting tool (Source: CR Group)
5. Automate your reporting
The average organization spends over $0.80 on reporting alone for every $1,000 of revenue, the equivalent of $200k for a $250M organization, or $400K for a $500M company. No matter how precise, specific and useful the report is, it will need to be updated sooner than anyone in the organization likes to admit. Pulling together and compiling the data, formatting numbers into charts, and pasting it into designated documents manually is simply inefficient. Finance teams bear the load most of the time, and in budgeting season, they are already stretched beyond their limits. The solution for this problem is creating a single source of budget data that feeds real-time information into dynamic reports and useful visuals. As soon as data at the lowest level is updated, everything in the model should change automatically. Once again, the new SaaS platforms we mentioned earlier can go beyond budgeting, and provide all the features you need to give your finance team a break. Literally.
If you're shopping for software solutions to help you with budgeting in your company, look no further. Click here to book a customized Farseer demo and learn how it can help you save up to 30 days a year by eliminating manual budgeting tasks.