6 best practice budgeting practices

Budgeting is a process that many business struggle with. They need them to set expectations, goals and targets but many operational and sales people - those with the subject matter expertise to best align the budget process with the day-to-day reality of a business- feel like they are a waste of effort.

The signs that your business might want to take a look at its budgeting practices are - 

  • It takes more than two months from beginning to end. More than three months and it really is time to act.
  • Budget owners - the people you ask to input into budget numbers - don't see the value in doing it because it doesn't relate to the goals of their area of responsibility. Especially if the whole process takes more than two months.
  • The budget result ends up inaccurate. OK ... so this one is a tricky one. A budget may become accurate because it acts as a cap on performance, which is a bad thing. Or budget owners may be gaming the budget process. We'll put that aside for this post and assume that if you are going to spend time putting together a budget then you want it to be either accurate or you want the variations to be reconcilable to valid internal and external factors rather than random error or poor budget owner judgement

So with that in mind, let's take a look at what might be considered best practice budgeting.

1. Better align strategic goals to budgets

A budget should reflect the broader strategy of an organisation. It should help to guide activities that align with that strategy.

Where strategy does not obviously cascade into desired operational activities - and it often does not - an additional operational planning stage may be required as part of the annual budget process.

The objective of this stage is to convert strategic statements into SMART (specific, measurable, agree-on, realistic, and time bound) goals which allows them to be incorporated into the budgeting process. 

2. Increase the use of modelling

Not every line of a budget is as important as another. Larger monetary-value items are by definition more material. Smaller monetary-value items are generally less material.

Other budget items are strongly correlated to volume or seasons or some other driver.

Where an item is both less material and highly correlated to another driver it is a prime candidate for being calculated - or modelled - rather than manually derived by a budget owner. Modelling these budget items will reduce the amount of labour involved in creating budgets and make the budgeting process more efficient. 

They can also make budgets more accurate by eliminating human behaviours, such as gaming.

Where an item is less material and weakly correlated to another factor or more material and strongly correlated to another factor a value judgement will need to be made as to whether it should be modelled or not.

3. Leverage forecasting in the budgeting process

Rolling forecasts provide a improved horizon of information by which to make better decisions and to increase budget cycle efficiency.

It can also provide a solid baseline for annual budgeting activities.

There is a train of thought that suggests best practice budgeting is no budgeting at all; that rolling forecasts can replace budgeting in many businesses, though that will not be espoused in this post.

4. Performance management based on like-clustered activities

KPIs for departments or activities of a similar nature can be defined and grouped. This has the potential to facilitate the development of appropriate KPIs that facilitate performance comparisons between departments across different services and products. 

5. Multi-faceted KPI selection

Best practice budgeting suggests a cross-section of leading and lagging, internal and external, financial and non-financial, and fixed and relative measures should be considered when selecting a final suite of KPIs. 

This promotes an accurate and relevant view not only of past performance, but also of the operating environment it will face in the future.

6. Support good processes with good systems

All top-performer budgeting and forecasting benchmarks are underpinned by the use of appropriate technology.

While there are several vendors in the budgeting and forecasting application market, it is dominated by Oracle, SAP and IBM

If you'd like to discuss how best practice budgeting might apply to your own business, contact us at BRZ.