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The yearly business budgeting process is something every company goes through. Used to establish how much will be spent during the upcoming year, business budgeting and forecasting can help companies realize when their spending has become out of line.
A budget also sets a target for monthly revenues. If actuals fall below the goals, management can find out why and take action immediately.
While the annual business budgeting process isn’t going away, forward-thinking companies realize how important it is to stay on top of the year’s business budgeting and forecasting process.
The key factor to remember is that things change. You can’t expect yearly revenues and expenses to remain the same year over year; otherwise, no company would ever experience growth.
Thus, you must examine the business budgeting process regularly to determine whether it still reflects actual circumstances. Ideally, management would update the budget to mirror significant changes to the company’s financial health.
For example, suppose three new clients signed a material contract for new services over a year. In that case, you’d want to update your budget to reflect the new revenues and any expenses associated with the earnings.
Similarly, suppose the company decided that it required an expensive new machine to support the business midway through the new year.
In that case, you should update the budget to show the requisite expense. Ensuring that your FP&A department stays on top of any changes throughout the year can go a long way toward ensuring your company’s financial success.
What Are the Benefits of Business Budgeting?
There are several key advantages to establishing a budget for your business. These benefits of business budgeting include:
Setting Expectations for the Upcoming Year
How can you make strategic business decisions if you don’t know what you want to accomplish? A business with no goals and no expectations will likely flounder. Thus, understanding what you can reasonably achieve in the upcoming year can give your company direction.
For example, if you set your revenues to increase by 10% over the upcoming year, you’ll have established a target for your sales team to work towards. Similarly, if you want to decrease the amount you spend on business travel, you can set a reduction to travel expenses by 25% from the prior year.
This approach tells your traveling staff that they should use other ways to meet with clients that don’t involve regular travel, such as online meeting tools.
Understanding When the Business Isn’t Meeting Expectations
Once you’ve established a yearly budget, you may compare it to actual monthly income and expenses. This comparison allows management to make strategic decisions with the new information. If there is a loss of regular clientele, leadership can find out why. Similarly, an unexpected rise in certain expenses may point to a problem.
Allows Companies to Plan for Funding
Establishing a budget allows businesses to determine when there is a need for outside funding. If it doesn’t appear that the company will have enough cash flow to meet its regular expenses, a funding boost can help alleviate the issue. Management can determine how best to obtain funding through either debt or equity financing.
What Does the Ideal Business Budgeting Process Look Like?
There are several business budgeting basics involved in the ideal budgeting process. These include:
Aligning Company Goals and Targets
The first step of any business budgeting and forecasting process is to establish the goals you want to meet in the coming year. These will vary from company to company.
Some may seek to maximize revenues and gain new customers through effective marketing, while others may want to cut unnecessary expenditures or establish realistic compensation plans. Others may desire a combination of both.
You should not create a budget in a silo. Thus, you cannot rely on your FP&A department to establish a budget on their own. Instead, everyone whose actions impact the company’s financials should be included in the discussion before deciding on the budget.
Testing Various Scenarios
Remember that the future is never set in stone. Thus, it’s important to test for various scenarios and see how they impact the budget. You could establish several budgets — one that is most likely, another that allows for the most optimal circumstances, and another for worst-case situations.
Under each of these budgets, management can establish how they would react to the given scenarios. Having a plan for best-case and worst-case outcomes allows for better outcomes should the unexpected occur.
Staying on Top of What Happens
Finally, it’s important to regularly compare the company’s annual budget with the actuals as they occur. As you spot variances, determine what they are driven by and document the reasons. Follow up with leadership to make sure they understand what is happening and why. This approach allows for better expeditious decision-making.
How to Modernize Your Existing Business Budget Process
Setting a yearly budget at the end of the year and then analyzing monthly performance doesn’t work anymore. Typically these budgets are out of date within a few months due to changes in the business environment.
Companies that recognize this are better positioned to adopt modernized budgeting processes outside of business budgeting basics that aren’t flexible.
The solution to modernizing the traditional business budgeting process is to adopt a rolling financial forecast. This type of forecast allows for better planning and adapts to changes as they come up. It allows for more strategic business decisions to be made.
Here are five tips to modernize your budget process:
Just Say No to One-and-Done
December’s fiscal year-end numbers often bear little resemblance to July’s realities — meaning budgets and forecasts must become more streamlined, accurate, and responsive.
Annual budgeting won’t go away, but spending weeks or months processing data and reconciling spreadsheets that are out of date soon after the consolidated master budget is published doesn’t cut it anymore.
Modern budget solutions:
- Increase the frequency of budgets and forecasts to reflect shifting conditions
- Make decisions based on data-backed insights rather than old information
- Change how resources, employees, and assets are allocated throughout the year and how the budget incorporates real-time opportunities and challenges
Adopting these solutions can result in a more streamlined and accurate view of how the business is performing, allowing for quicker and more relevant decisions.
Focus on Business Drivers, Not Cost Centers
Traditional business budgeting basics focus on allocating resources to cost centers, but business objectives (projects, products, and service lines) result from end-to-end cross-functional processes across the org chart.
So if you determine the level of resources and spending based on forecast demand, then budgets and rolling forecasts can reflect company-wide performance rather than that specific to a cost-center department.
Modern budget solutions:
- Enable organization-wide access to reports and data, allowing everyone to have visibility into the enterprise’s performance, including into individual departments
- Review forecasts against budgets to eliminate confusion among competing departments
- Provide real-time information for the needed insights to support better decision-making at all levels of the organization
- Use drivers to determine the level of needed capacity (i.e., types and numbers of employees) to match your supply of capacity with the demand
Giving the entire team access to the yearly budget and ongoing forecasts gives them the data they need to meet targeted goals and make immediate changes when required.
Create Rolling Financial Forecasts
More than ever, fluctuating market conditions make accurate forecasts of future demand load (e.g., customer orders and sales) extremely challenging. Rolling financial forecasts help manage investments or financing determined by cash flow. They provide visibility into business performance using time horizons that reflect the speed of your business.
Modern budget solutions:
- Generate rolling financial forecasts that accommodate real-time shifts in market conditions
- Enable self-service reporting so everyone in the organization can measure their performance against company-wide KPIs
- Help everyone in the organization understand the downstream effects of their resource allocation decisions
The rolling financial forecast process gives departments the ability to measure their own success. When they have established goals that they know they need to reach, they’re more likely to work towards them.
Look Forward, Not Back
Most budgets and forecasts are outdated before you push “publish” or soon after. And some factors are impossible to take into account (natural disasters, pandemics, broken supply chains, work stoppages).
The rearview-mirror orientation of traditional budgeting (e.g., last year’s actuals create this year’s budgets) often results in increased “actuals” as managers exhibit “use-it-or-lose-it” behavior by spending needlessly to attain their previous fiscal year budget.
Traditional budgets can’t keep up with the speed of modern business. One needs to look forward through the windshield.
Modern budget solutions:
- Respond faster to shifts in market conditions with real-time access to financials
- Adjust outdated budgets and forecasts as change occurs
- Move leadership discussions toward insight, planning, and action, rather than using the budget as a cost-control mechanism to punish those with unfavorable cost variances
Modern budgeting requires a forward-looking, adaptable approach that responds immediately to market and business environment changes.
Use the Right Tools for the Job
Creating a budget process that keeps up with the pace of today’s business requires a comprehensive, collaborative, and continuous planning platform — one that gives you robust, accessible reporting and modeling capabilities; dashboards that provide visibility into overall company performance; and automated tools that streamline budgeting and forecasting processes.
It’s not enough to simply provide the right tools for the job; in addition, employees must be given the training to use them properly. Training cannot be emphasized enough, as it can be the difference between accurate budgeting and scrambling to form a plan month after month, quarter after quarter. In general, training across midsize and large companies has been increasing since 2018, in part due to the implementation of more collaborative project management and budgeting platforms.
Modern budget solutions:
- Enable comprehensive planning that aligns the actions and priorities of everyone across the organization around common KPIs
- Create opportunities for collaboration by giving everyone access to the data they need and deserve
- Adjust and update budgets and forecasts continuously so you can navigate volatile market conditions in real-time
Don’t let traditional budgeting lock you into outdated assumptions and fixed targets. Those outdated targets handcuff managers when the organization changes directions. Some managers view the fiscal year budget as a “contract” that they will not deviate from to minimize unfavorable variances from their allotted cost center budget expenses.
This short-term focus jeopardizes the longer-term view. The modern FP&A professional knows the truth: aligning budgets and rolling financial forecasts with comprehensive plans lays the groundwork for proactive rather than reactive planning — a significant strategic advantage in today’s highly competitive environment.
Modernize Your Budget
Adopting a modernized budget and proper forecasting process is mandatory in today’s business environment. Those companies that understand the impact that continuous rolling forecasts can have are in a better place to make strategic decisions that positively impact the business and attract growth. QBIX Analytics provides companies with strategic forecasting and detailed business insights. To learn how our solutions can benefit your business, contact us to schedule a meeting today.