The Dreaded Budget Cycle

The Budget Process

One of the reasons why not everyone enjoys going back to work is the much dreaded budget cycle. Around September the budget process starts to create the plan for next year. In most cases directions from management are available, like turnover needs to increase with 3% compared to last year, costs need to be reduced with 2% and the expected outcome of the budget cycle is a turnover of €5 million (for example). Sometimes even strategic projects are mentioned to budget in more detail for 2025.

So the top-down approach is explained by management using presentations, a Budget Letter and team meetings. Departments and geographic locations will create, based on the budget guidance from management, the new budget plans. A copy of the previous plan is created and named ‘Budget 2025’ and adjusted based on market knowledge and the top-down guidelines.

The Finance department starts to chase the different stakeholders holders as soon as the deadlines are approaching. Only a few will deliver the budget 2025 plans in time, most need to be chased, leaving Finance with limited time to collect all the data (mostly in Excel, which file holds the latest version?) and consolidate the numbers. Just in time (after putting in a couple of nights of overtime), the consolidated version is ready to be presented to management.

Surprise, surprise, the consolidated numbers do not match the expectations of the management team. So additional guidance is communicated (an additional 2% costs cutting for example) to ask the budget owners for a revised plan. Excels are floating around in different versions (Budget 2025 Final Final Final v1.0.xlsx), budget owners, Finance and management are all frustrated of the effort it takes to come to an agreed budget for 2025. to speed up the process, in some cases management decides to incorporate a few last minute changes to create a final (Budget 2025 Final Final Final Final v1.0.xlsx) budget that can be approved.

The results? A team of budget owners that are frustrated because of the amount of work it took to come up with a plan (many iterations, high pressure due to tight deadlines) and a budget 2025 that is not recognised by the budget owners. Due to all the changes and the last minute updates by management, the final numbers are not recognised, resulting in a non-committed workforce to achieve the budget numbers. During 2025 deviations will start to appear based on actuals versus budget and the blame-game can start.

In all, the complete process is a waste of time and effort, does not reflect the true potential of the organisation and therefore leaves money on the table. But there is a way to improve all of this!

Improved Budget Process

There are a couple of improvements to make to make sure the described process as above is history! Recommended improvements which will be discussed in more detail.

• Connect Strategy to Budget to Operational Plans
• Start to use a rolling budget & forecast cycle
• Get rid of Excel

Connect Strategy to Budget to Operational Plans

A budget (Finance) cycle is never a standalone process. The budget must be a reflection of the strategic intent, as captured in the Strategic Plan for the coming years. This strategic intent should be a guidance for the long term, broken down into financials plans per year (budget) to be able to control the directions. Are you as a company moving in the direction of the strategic intent or are you diverting. The guidance as described above from management, should always be related to this strategic intent.

Once the budget has been created, the translation can be made to the operational plans. What is, based on the strategic intent and the financials, the impact for my department (Sales & Marketing, Supply Chain, Finance, Operations). And which strategic projects will be implemented and reflected in the budget to stay on track of the strategic intent?

Once the actuals start to flow in, you have the necessary feedback loop in place, to spot deviations and plan the actions to get back on track.

Start to use a rolling budget & forecast cycle

For most people involved in the yearly budget process, this is not the most rewarding time of the year. People feel frustrated, not committed and overworked. If you keep insisting on a yearly budget process. Let em introduce a monthly rolling budget & forecast cycle.

Once you have implemented the previous step (connect Strategy to Budget to Operations), it becomes much easier to implement a monthly rolling budget cycle. The Strategy creates the outlook for the coming years (normally 3 to 5 years out). The creation of a budget on a monthly base for the coming 18 months should not be too big an effort for Finance because that is already their best practice. Repeat that process on a monthly base, keeping tra ck of the quarter and year milestones and you a rolling budget.

Do the same to translate the rolling budget into a rolling forecast on operational level to translate that into departmental plans and you have the top-down approach ready. The actual versus budget comparison can be done easily after the closure of each month, creating the bottom-up feedback loop. What are the deviations, what do we need to change to get back on track. That is the input required for the new monthly budget cycle.

And yes, it is very easy to write that down in this blog and more difficult to implement, but it has be done by other companies, resulting in a stable and easy to maintain budget process. And more important, a monthly rhythm to monitor and adjust if required.

Get rid of Excel

This is a no-brainer. If you are still using Excel to support the budget process, things will never change. yes, Excel is flexible and easy to use by almost everyone, but has its flaws. Select and install a proper planning platform that supports direct aggregation top-down to bottom-up. And top-down adjustment that are reallocated based on known allocation methods. A supporting collaboration environment in which decisions can be logged, questions asked and stored for future references. A connection to the Finance system to load the monthly actuals to allow for immediate insights on deviations from plan. Supported by graphs and the main KPI’s.

And if this planning platform is also used to support the operational plans as discussed above, like Finance, Sales & Marketing, Demand & Supply Planning, you start to create true connected planning. Where the outcome of one planning process is the input for another. Immediate insights based on changes, readiness to adjust plans in a short time frame. And even create scenarios.

Conclusion

If that could be the case, the much dreaded budget cycle will be much more enjoyed by all involved. It starts to add value to your organisation, it creates a better understanding of the required actions, projects and it creates transparency across the organisation. So support the strategic intent. If that does not put a smile on the face of the budget owners, I don’t know what does.