How to refresh your budgeting process in 5 easy Steps

CFOs are taking on more responsibilities than ever before and are expected to contribute with more strategic advice through real-time data and game changing insights. But traditional static budgeting procedures often hamper these CFOs in meeting those new objectives, leading 63% of CFOs (see below for source) to report a lack of time for strategic analysis due to lengthy data gathering and reconciliation tasks

With so many advances in technology, budgeting and planning need not be the bottleneck and source of frustration that it can so often be.  

Below, we go over 5 steps to refresh your budgeting process.

Step 1. Stop relying solely on spreadsheets

Many companies still rely on spreadsheets for their budgeting and planning process, and finance teams struggle  to collate multiple spreadsheets across the company. Even worse, most spreadsheets contain serious errors, which compromises the integrity of the data and reports.

Additionally, spreadsheets are not made to scale. They are a great personal productivity  tools for ad-hoc analysis. But when more than one person uses them, they become a barrier to collaboration and efficient workflows. Some employees spend an enormous amount of time – 12 to 18 hours each month—on spreadsheet maintenance tasks such as updating, revising, consolidating, auditing, and correcting.

All this time wasted on low-value tasks keeps finance away from more valuable pursuits such as strategic analysis. An Adaptive Insights CFO Indicator Report indicates that 63% of CFOs report a lack of time for strategic analysis due to lengthy data gathering and reconciliation tasks.

The solution to these issues is automating your budgeting process and making it accessible to business partners at any time, from any location. Cloud-based planning and forecasting software encourages collaboration, rather than obstructing it. It provides a single version of the truth that all users can work from, so you know your data is right 100% of the time.

Step 2. Replace multiple budget iterations with continuous planning

The typical budget process involves managers coming up with a budget and sending it up the management chain to the executive suite. Most of the time, that version gets rejected and sent back. Managers revise their budgets again, and this process repeats itself as an seemingly endless cycle. By the time the annual budgeting exercise is completed, market conditions have changed, and the assumptions are out of date.

A continuous planning process allows you to manage budgets and raise visibility into future market conditions. It enables you to develop scenario and what-if planning to model how your plan might adapt to changes in the market. Effective scenario planning can help you manage the minefield of business finances as carefully as you can with a number of unknowns, allowing your CFO and finance team to make forward-looking decisions.

Step 3. Focus on drivers, not detail

Many organisations try to budget at the chart of accounts level, and technology enables them. They often add a lot of detail, include every penny, and get caught up in the smallest details, because they believe that it is the way to develop a good budgeting plan. However, the only two things you guarantee when adding detail to a budget or plan include creating a lot more work for everyone, and more opportunities for errors.

Instead of focusing on detail, the focus should be on significant business drivers like risk, profit, and working capital. Driver-based budgeting allows you to allocate resources based on past performance, enable CFOs to help drive business priorities, and respond quicker to changes in the marketplace.

Step 4. Don’t use the budget to control costs

Some organisations fear that without a budget, costs will spin out of control. Some CFOs even punish people for overspending. However, this attitude creates some serious problems. Managers won’t exceed their budgets, but they won’t spend any less either. They often feel entitled to the funds they worked so hard to negotiate and know that next year’s budgets will be based on this year’s spending.

A budget that is ‘set-in stone’ once a year can’t shift in response to changing demands, which stresses existing resources and causes service levels to deteriorate. Additionally, it reduces flexibility which means budget allocation could be optimised.

Shifting to dynamic resource allocation that works from the latest set of assumptions enables you to respond quickly and flexibly to changes in the economy and your industry. Instead of asking “Do I have the budget for this?” encourage employees to ask, “Is this really necessary? Is it the right thing to do? Does it support my strategy?

Step 5. Tie bonuses to relative performance, not budgets

Linking bonuses and compensation to budgets can bring out unproductive behaviours. To ensure their bonus, managers often set targets they can easily reach, or provide targets that are below what they know could be achieved. They act conservatively instead of trying to optimise the organisation or take advantage of market opportunities.

Your current market position might be good, but over time, if you’re not moving forward, competitors will catch up and even overtake you and you’ll find yourself in a much weaker position.

Instead of focusing on numbers and fixed targets, a system that rewards relative performance should be implemented. Tie bonuses to outcomes—what value did employees deliver in the environment they were in. Evaluate how you did compare to the opportunity you had, and analyse your competitors.

As suggested earlier, if you refocus your budgets on a few key growth drivers, it will make it easier to refocus your performance and rewards systems from short-term earnings to long-term growth drivers.

Cloud-based systems (those designed and implemented by Clear Plan and based on the award winning Adaptive Insights platform) are flexible, easy to use, and quick to deploy, while offering powerful features to manage workflow and encourage managers to collaborate in the planning process.

Pinsent Masons, a global law firm, implemented an Adaptive Planning model to help with lengthy accounting and closing processes. The firm has offices around the world with separate databases which made it difficult to incorporate and collate data. Our solution accelerated the monthly close process by 75% going from 15 to 2 days, and increased productivity by allowing the team to focus on long-term investments and strategic decisions.

Learn more about improving your budgeting and planning in our eBook: Making the Shift: Four Secrets Behind Great Budgeting and Planning