Ron Baden, Host Analytics Chief Product Officer
Budgeting for 2018 is in high gear, and many companies are in the throes of an inefficient budgeting process, and anticipating equally difficult Q1 forecasting. In a report from Radius Global Research last year, two-thirds of respondents said that their company’s financial planning, forecasting, and reporting processes were highly inefficient, with 25 percent complaining that their budgeting process takes four months or longer.
If you’re working for a company that is struggling to reign in their budgeting and forecasting processes, you should be following these best practices.
Best Practices for Corporate Budgeting and Financial Forecasting
According to Peter Emerling, director of technology and management consulting at RSM, there are five best practices for improving the budgeting and forecasting process:
- Reduce the number of cycles per process
- Simplify as much as possible
- Continuously evaluate past performance
- Drive accountability through accessibility
- Refine frequency and level of detail
Step One: Standardize Data and Processes
Manual error is perhaps the biggest culprit in inefficient budgeting. Using standard templates and a single, consolidated method of data collection will greatly reduce those errors and help to streamline the entire data collection process. Also, consider a cloud-based system for data collection to eliminate version issues and automate data integration.
Lee Johnston, VP of finance and corporate strategy at LT Apparel, knows about streamlining budgets. His company’s budgeting process is complex, taking in revenue from wholesale, retail, and online channels. When they relied on Excel for budgeting, he had to deal with error-prone spreadsheets with “ghost links” to files that had long been deleted, as well as version issues because multiple offices updated their local copies of the spreadsheets. Moving to a cloud-based enterprise performance management system with consolidated data collection eliminated their version control issues.
Step Two: Focus on Business Drivers
Many companies are turning to driver-based planning to focus on the real drivers of the business, as opposed to a series of numbers in a spreadsheet. The goal of driver-based planning is to identify and concentrate on the factors that are most critical to the company’s success, and then create mathematical models that enable managers to run scenarios based on these drivers to understand the impact on projected business results.
Instead of budgeting each line item in their chart of accounts, cost center managers instead focus on the criteria that truly impact the business and leverage driver-based planning techniques to calculate those line items. This technique allows organizations to run faster budget iterations using budgeting for initial target-setting, and can shorten the entire cycle by weeks.
Step Three: Continuously Evaluate Past Performance
For accurate planning, the ability to easily compare budgets to actual performance is critical. Invest in a platform that allows you to draw in data from other systems in your organization and use that information for accurate calculations and better predictive analysis for the future. Using past performance data allows users to create financial and operational models that can perform “what-if” scenarios to predict the results of business decisions.
Some systems even have a unique and powerful “breakback” feature that can effectively manipulate the data within a model, allowing you to get even more insight from past performance. Users can override the model’s output with a new target result, and get the proportionate input values to match. For example, if the current budget results in revenue of $100 million, using this feature you could change the revenue to a goal of $500 million and the model would generate the corresponding budget allocations based on past performance. This process is either not done at companies because of the amount of time it takes or it is done but is extremely inaccurate due to the number of inputs needed.
Step Four: Drive Accountability Through Accessibility
This one is simple. Stop the “it’s not my plan” comments. Make the business unit leaders accountable for their own budgets and plans by ensuring that they are not locked out of the finance process. Many are unequipped with the tools that can help them to complete these processes quickly, comprehensively, and accurately; and therefore, rely on guesswork while taking less valuable information into account. This is a huge mistake, because giving them access to all the data they need to create accurate budgets with real-time data, gives them the confidence to make data-driven decisions. Too often, because of disconnected data sitting in a variety of systems and spreadsheets, it’s hard for finance to give the users the data they need.
Reggie Newsome, senior financial analyst for National Public Radio, not only has to deal with budgets from hundreds of partner member stations; but also 14 internal departments with 140 cost centers. The budgeting process dragged on for months, and reporting often derailed the state of their financial close. To drive a more automated, and accurate budgeting and reporting process, Newsome’s team gave managers self-service access to detailed reports about the state of the business and what their respective department is contributing to the organization on a monthly basis. This reduced the amount of time Newsome’s team spent creating reports, and gave the managers more insight to create their own budgets and plans.
Step Five: Refine Frequency and Level of Detail
If you’re working with an annual budgeting and planning process, you know that the budget is often outdated almost as soon as it’s approved. Leading organizations revisit the budget results on a regular basis rather than waiting a year before thinking about it again. Consider continuous planning, defined as “using technology to enable rapid planning and review cycles to support a more agile organization.”
If you’re trying to shorten the budgeting process, you can’t rely on huge, granular, static budgets. Instead, recommend an annual budget that sets initial targets and then revisit and update the budget assumptions on a regular basis through rolling forecasts.
In their purest form, rolling forecasts allow organizations to project future results based on a combination of actual year-to-date financial results and the original budget, or updated revenue and expense forecasts for future periods. The future forecast period can extend to the end of the fiscal year, but in its purest form, the rolling forecast period typically extends out four to six quarters into the future.
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