I suppose there are as many jokes about budgeting as there are about mothers-in-law. Many people dread the budget cycle as a necessary evil to be endured. But, it doesn’t need to be this way. Indeed, to many companies, budgets and forecasts are strategic weapons. These companies deploy best practices to lead the way.
Best Practice #1 – Share the Vision
The real goal of budgeting is not to count travel costs per salesperson. That number may need to be computed during the budget cycle. The real goals of the company are to achieve a certain level of revenue attainment, while keeping costs under control. Do they need better products, more products, more salespeople, better supplier relationship management, etc.? The budget cycle should start out with a clear articulation of operational strategy over the next 12 months.
Best Practice #2 – Share the Drivers – Build driver-based models
As stated above, travel expense per salesperson does not drive the operating vision. But, the rollout of new products could have a major impact on the new operating strategy. Suppose you are rolling out two new product lines. When will they be available? What is the sales plan? What are the costs? What are the revenue targets? Will they cannibalize older products? Use drivers to model the new product strategy.
Best Practice #3 – Develop Rational Budget Templates
Budgets will need to be developed across a variety of dimensions: Division, Product, Market, Administrative function (e.g., Finance, HR, IT). The tricks are to: a) keep the number of reporting units to a manageable number, and b) keep the level of detail in each budget relatively spare. The goal is always centered on operational strategy.
Best Practice #4 – Include Capital Projects, New Strategies, Sales Plan HR Plan …
There are likely to be new capital projects in the next 12 months, and they must be reflected in the budget. Moreover, for new strategies being executed, all current work on the new strategy (especially capital outlays) must be included in the budget. Also, operating plans by department should be developed and linked to the overall budget
Best Practice #5 – Publish the Budget Calendar and Accountability
Here are some of the required components:
–For each individual budget, define who is responsible, who will be reviewing, and when the review must be completed.
–For each individual budget, define how and where the budget will be aggregated. At the aggregation level, each person responsible must ensure that all individual budgets are delivered and reviewed on a timely basis.
–Corporate functions (e.g., Sales, Manufacturing, HR, IT) must align their budgets with the operating units.
–Budgets will be aggregated into budget books, for review with top management. The budget books will include summary reports, graphics, dashboards and scorecards
–After top management review, time should be allocated for revising the budgets.
Best Practice #6 – Visibility
On a monthly basis, management will publish the budgets and actuals. Management will also provide a brief summary on progress on the operational strategy, and any budget revisions that have been done.
Best Practice #7 – Forecasts and Revised budgets
Revising the budget is encouraged if it can materially help the operating strategy for the current year. In addition, it may be quite valuable to create forecasts beyond the current budget horizon. Forecasts with no impact are obviously a waste of time.
Best Practice #8 – Incentives
Managers who are accountable for budget delivery should have clear objectives (and incentives) built into their compensation plan.
Best Practice #9 – Acquire Best-in-Class Software
In order to meet the best practices described above, software should be acquired that includes:
–budget preparation
–forecast delivery
–modeling capability
–data integration
–unified data repository
–team management and accountability
–report writing, graphics, dashboards, scorecards.
Now, best-in-class software will be quite useful for deploying best practices, but not all the software vendor’s customers are deploying best practices.
OK, this is a little tricky:
The “best” best practices improve the operational performance of the company. And, of course, strong budgeting and forecasting software is required.
The “next best” best practices improve the operational performance of the budgeting and forecasting process. Indeed, shortening the budgeting cycle by 60 days/year is a good thing. But, really, if the new budget doesn’t help the company perform better, they may have a lower TCO, but where are the real benefits?
Best Practice #10 – Get educated on best practices
–Ask the software vendors to give you case studies on customers who have deployed best practices
–Ask the software vendor for white papers
–Talk to the software vendors’ implementation team
–Talk to the software vendors’ implementation partners
–Talk to other consulting firms.
–Talk to analyst firms
–Join forums on-line (e.g., Proformative)
Bottom Line: We can’t promise to put the joy back in budgeting. But companies that deploy best practices for budgeting and forecasting earn more profits, which make their shareholders smile.
