'Tis the Season: Corporate Budgeting Best Practices

by Tom Seegmiller

If you stick to these best practices, finance teams will be able keep businesses on track and empowered to drive holistic change.

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The most tedious and time-consuming season of the year for every company has begun—budgeting season. Budgeting is a critical process for every business, but teams dread the long days spent consolidating numbers from various sources, fixing errors that stem from manual data entry and keeping track of what’s completed, reviewed and signed off on. As finance professionals across the board begin the process of preparing their annual budgets this fall, many may be asking themselves: Is there a better way?

As budgeting season kicks off, here are four best practices to help finance teams work strategically to gain greater confidence in the results.

Understand the Value of Historical Data

Some say the past will haunt you, but when it comes to budgeting, the past is your friend. As you build a detailed budget, your organization’s historical data will be the most helpful information in your toolbox. Traditional budgeting uses past performance and historical data as a starting point to inform the current budgeting process. This is critical because historical data must be used for predictive budgeting and for understanding what drives business growth. Comparing actual performance to prior expectations will allow you to better predict future performance.

Historical data is also used for scenario modeling to help understand the potential effects of your budgeting decisions. Strategic finance teams use scenario modeling as part of their daily, monthly or annual practice, keeping their finger on the pulse of future scenarios to ensure they know which levers they can pull to adjust course. In times of uncertainty, like in the last 18+ months, this practice is even more valuable.

Connect Your Data

If you ask anyone in finance what’s keeping them up at night, chances are “data” will be part of that conversation. Today, disconnected data is one of the top challenges faced by finance teams—and that pain point is magnified 10 times during budgeting season. The culprit? Data silos. Data silos make it incredibly difficult to collaborate with cross-functional stakeholders, leading to unreliable budgets and forecasts that don’t capture a holistic view of your business. According to a survey of business leaders, finance executives and operations professionals, when asked to name key data challenges, 57% of respondents said “multiple disparate and disconnected data sources.” Additionally, 51% noted that “too much time wrangling data” is a major roadblock as well.

These statistics are concerning because data is critical to the budgeting process. It allows you to understand what drives business performance, what’s contributing to growth and where you’ve found success before, in order to fuel the current budget, predict its future success and make tweaks based on market conditions along the way. Connecting your data and being able to access clean, current data will build a better corporate budgeting process.

Know Your KPIs

For many companies, growth and ultimate success can be tightly aligned with consistency of results. And those results can only be achieved if your team consistently meets desired goals and targets. Understanding which factors most contribute to your company’s growth will let you know exactly where to allocate your resources for a better chance of success. It’ll also make it easier to model scenarios to understand how they might affect future performance so that you know exactly where to focus your budget for the best returns.

While some prioritize KPIs tied to financial goals, non-financial metrics can be just as, if not more, critical to your organizational performance—and to your budget—as financial drivers. Some examples include customer conversion and retention rates, employee turnover rate and employee productivity rate. Non-financial drivers and KPIs play an important role in helping to keep your budgeting process on track so always ensure they’re in your line of sight too.

Stick to a Flexible Plan

Budgets are traditionally inflexible, but finance teams today understand that changes are sometimes necessary—whether that means introducing rolling forecasting or a flexible budgeting process or using scenario modeling to keep you on top of what’s ahead and letting you course correct your budget when necessary.

Having agility built into your budgeting process will empower you to make changes whenever the market or your business requires—ensuring you have the resources available no matter what happens. Research from McKinsey found that agile organizations typically outperform competitors in adapting and pivoting in response to the current pandemic.

As mentioned above, forecasting and scenario modeling enables you to be more strategic and agile—which is critical for today’s uncertainty. For example, forecasting reveals business trends that help you determine if you need to adjust course. It’s also easier to manage cash flows and capital requirements if you have a well-informed prediction of where future expenses are likely to fluctuate. On the other hand, scenario modeling helps you identify your company’s key drivers and areas where you need to improve measurement. Strategic planning executed with an agile mindset can yield a transformational shift in an organization committed to growth and scaling.

Every organization approaches budgeting season differently, but if you stick to the basics—the best practices outlined above—finance teams will be able keep businesses on track and empowered to drive holistic change.

Tom Seegmiller is VP, FP&A at Vena.