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How to redefine your budget planning process

Published on 27 April 2021

How to redefine your budget planning process

Wherever you are in the budget cycle, you may be thinking: this year will be harder than ever, as we are so uncertain of what will happen, even over the next two or three months. Yet, in fact, when do we ever, really know? Perhaps the changing nature of the pandemic means that we are more prepared, constantly reviewing, analysing more scenarios or drivers. At least it’s clearer that forecasts are volatile, to be used as a guide not a fixed point. All this is an opportunity for us to take a fresh look at how we approach this part of planning.

Why do we need a budget?

Let’s start with the purpose of a budget, to ‘plan, organize, track, and improve’ your commercial performance. From controlling spend to consistently re-investing a portion of your income, a budget helps you stay on course, in pursuit of your long-term goals. Our Planning Standards benchmarking framework describes it as cross functional alignment.

So, a good budget:

  1. Acts as both a plan and a control to guide decision.
  2. Creates accountability around key assumptions with the right supporting metrics.
  3. Uses robust governance, with change control, data checkpoints and handovers.

A budget is a tool for predictive analysis. More than just a forecast, it demonstrates what can be expected, when and why. In this way we can track variances and rapidly learn from these. A budget is part of how we implement a strategy. It is a commitment to deliver an agreed, strategic outcome. In our world, operating budgets and resourcing plans will contain detailed income and expense analysis for different operating units.

For something so important, you might expect training on the different methods and how to apply them. But how many of us just learn from the person who used to do it before us? If you ask your key stakeholders what the purpose of your budget is, would you get the same reply? Is it a plan? Is it a control? How does this differ from the operating plan? What are your budget responsibilities? Would these be aligned? How should we use the budget? To reframe the budget process, consider what behaviours it drives. Do we operate within and always under? Is it being used for borrowing money? For motivating performance? Has there been a stretch built in, or is this a realistic budget? Is this a fixed or flexible budget? Clarity is required to describe what a budget is and isn’t.

Different Budget Approaches

Let’s look at some key budget choices. The Corporate Finance Institute identifies four different kinds of approach. Incremental budgeting is common and easy to explain. Do you improve performance by raising sales 10% and cutting headcount by 10%? It works well where primary cost drivers don’t change. Activity-based budgeting (also top-down) makes clear what’s needed to drive key outcomes, eg £x revenue, y% rise customer base or market share. Value proposition budgeting makes clear how everything in the budget delivers value for the business, to help avoid unnecessary costs. Zero-based budgeting (bottom-up) builds up from zero, justifying each expense, a very common approach for forecast headcount.

A blend of approaches will maximise insight. You may start with an incremental approach, for instance, to set a benchmark, with activity-based models adding high-level detail and a zero-based approach to identify any gaps. This is common with staffing budgets. A value approach can help us challenge how things are currently done. In addition there will be different methods of involvement and business cultures. Each drive different levels of buy-in, engagement, understanding and accountability. For instance, consider the impact of working both top-down and bottom up.

Top Down: Working down from strategy and financial goals is always important, but, if this is imposed (“just implement it”) you often find a disconnect between targets and operational practices (“we haven’t got enough people”) and a lack of engagement and buy-in (“nothing I can do”). If this is your chosen method, set the expectation “This is reality and we must just get on with it”. In implementation, focus on understanding the gap between budget and reality. What can be done differently, or stopped, to help achieve both budget and strategic objectives.

Bottom Up: A participative budget approach engages people in recommending realistic targets for activity and costs. It is healthy to do this regularly. Be aware however, of natural bias. It is common to over-estimate the value we believe we can add or the underestimate the cost. This risks performance shortfalls against budget. Also be wary of key numbers. We’ve all been there when Finance have asked for sickness to be lowered! A 1% cut in shrinkage is very significant - attractive financially but hard to deliver. What difference does 10 seconds make on process or handling time? In one large operation a rise of 12 seconds would cost £1m a year.

A Blended Budget allows for negotiation between topdown and bottom-up approaches. Do they meet for healthy challenge? Can it create shared responsibility? Bottom up is a good way of identifying any possible gaps, gaining buy-in and generating the need to identify new ideas. Crucially, this should involve the whole business and not separate functions in siloes. The reality is that you are probably doing versions of these different approaches anyway. They may just not join up or being undertaken formally in a planned way.

Learn from Best in Class

Three elements form the foundations of success. Firstly, visibility of the planning/budgeting process, involving the right people in budget review and sign off. Secondly, good long term planning models, backed up by clearly understood concepts & a common language. Finally, does everyone understand the impact of key parameters on the targets of stakeholders? A blended, negotiated budget process brings together key stakeholders so you truly understand variances and what actions you need to trigger. How is performance against budget managed and reviewed? Link the budget stage of the planning cycle to strategy and operating models (before) and operationalising the plan (after). If we’re short of resource, we need to inform the business of the impacts.

For the best teams, this is no longer good enough, as we see in our Standards Benchmarking and Award winners. For many, there has been a real shift in recent years. At the highest level of our Standards Benchmark, we are looking for interactive models which engage and influence – and regular sign-off/review that works across functional siloes to build alignment. Look for business-wide understanding on assumptions, how the models are developed, and the process for modelling change in factors which influence decisions. You need visibility on the impact on internal & external stakeholders, joined up across the business and among all levels of stakeholder. A great budget process creates alignment. It helps you establish ‘realistic’ budget targets and put initiatives into place to deliver the necessary changes, for customer, colleague and commercial performance. So, do you:

  • Use models interactively in meetings to achieve buy-in & accountability?
  • Generate and evaluate opportunities for improving performance?
  • Propose actions and priorities, offering supporting evidence?

Models need to help users understand interdependencies, risks or tipping points. Do we use the budget to retire out-of-date metrics and refresh all our reports? We need them to help us to talk about what’s happening and not assume everyone knows what we know. In this way, the planning team can be the Guardians of the Truth, helping bring together different functional siloes. Are we learning from variances to build into future budget assumptions and avoid hindsight bias? There can be temptation for an almost tactical view of the budget, as flexibility will be required to meet uncertainty in this post COVID world. Equally, we may just hope that everything will return to normal. From my conversations with members however, I am confident that following the best practice principles will support better decision making, even in these hard times.

Author: Phil Anderson

Date Published: 27/04/2021

This article was first published in the 2021 Best Practice Guide - Unlocking Opportunities: You are the Key

To download a full digital copy of the Best Practice Guide, click here

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