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3 Things That Make You Love And Hate The ‘Budgeting Cycle’

1. Purpose of the budgeting cycle

Most budgeting cycles are focused on being precise and accurate. The budget cycles are designed for control, command and be able to predict the future which is uncertain by its very nature. Rigorous control is exercised to ensure the ‘numbers’ come in within expectation for each silo and ‘challenges’ are sufficiently distributed. Command is then exercised to ensure each business unit and function executes on the detailed plans that add up to the total expected.

The control, command and predict approach however fails consistent in a dynamic environment and that coupled with current uncertain market conditions and it sets up the business for failure. Instead a budgeting process which focuses on performance improvement and maximising business resources is much more likely to add phenomenal value to the business. An effective planning and budgeting exercise enable’s a business’s ability to adapt, learn and grow in uncertainty and potentially maximise opportunity.

 

2. What should be the focus for planning

A planning cycle most typically consist of a bottom up roll up either by a simple consolidation of numbers or via a detailed driver based budgeting or any variation of the same from zero based budgeting to a hybrid form of the various budgeting techniques. Once the numbers are rolled up, they are typically ‘hair trimmed’ by between 10-20% for being too high under the guise of prioritizing and painful cuts. The challenge with these negotiations is loss of confidence of the budget owners and more often then not, prioritizing may not always be the right priorities which may add maximum value.

An improved approach would be using the strategic direction determined in the step 1 above and providing the same as a guide for the functions and units at the kick-off of the planning cycles (so right about now!). These strategic guidelines can then drive the right discussions and difficult prioritisation is then done at the grass-root level to extract the best possible value for the business. By properly aligning resources with strategic priorities, companies can better manage the tough trade-offs that should be made but aren’t or because decisions are being made by the wrong people.

3. Frequency of the budgeting cycle

Planning cycle if restricted to annually or quarterly will mean focus and need for accuracy is much greater. Additional as it is used as a performance metric tool, it will be subject to ‘human influence and negotiation’ so as to make it more achievable. Additionally, when the process is extremely tedious and painful, the participants will try to focus on accuracy to make it worth their effort.

While alternately if the planning cycle is much more of a rolling forecast with ability to adjust the same weekly/monthly in order to again ensure course correction and fine-tuning in order to meet the strategic objectives laid out about, the stress on the business due to the process is minimised while complete and coordinated effort can then just be towards achieving the strategic goals of the business. An agile and fail-fast approach can ensure course correction while a streamlined processed supported by the correct technology can ensure insightful and predictive planning which can be adapted as the business evolves to new opportunities and threats. Precision is not the same as accuracy and plans that are flexible enough to focus on what truly creates value are worth the discomfort.

To learn more about creating a value adding FP&A Function do read our blog on the same.

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