YOUR ULTIMATE GUIDE TO BUDGETING

To simply put, the process of planning a budget is to make educated guesses about future expenses and revenue over a month, a quarter, a year, etc.

Budgeting plays a vital part in any organisation regardless of size. It acts as a financial guideline, showcases where the business is currently at and where it aims to be. 

For some, the process of building a budget is downright tedious, time-consuming, and challenging. What's more, businesses have to worry about not only short-term budgets but also long-term ones.

If executed efficiently, budgeting can be hugely beneficial to enterprises to boost corporate performance management.

How long should it take to build a budget?

Based on a study done by APQC on 2,617 organisations in 2017, the answer to this question is 25 days or less for top performers, and 56 days or more for the bottom performers. Median performers complete the process in 32 days. 

How many budget iterations are required to build a budget?

In another study done by APQC on 1,450 organisations, 25% of the top performers state that they have four or fewer budget iterations. On the other hand, 25% of the bottom performers have at least eight iterations before finalising their budgets.

How many budget drivers are needed?

There are three basic financial statements used in a budget: the balance sheet, the income statement, and the statement of cash flows. It is important to include all three statements to understand the financial flows through the entire organisation.

Planning, Budgeting, and Forecasting (PB&F) is one of the three management processes that constitute Enterprise Performance Management (EPM). Below is a quick comparison between planning vs. budgeting vs. forecasting.

Financial Planning

Financial Planning is a tactical process in which the long-term direction and vision of the organisation are defined. The outcome of this exercise is a financial plan, which generally outlines the organisation’s financial objectives and a course of action toward achieving those objectives.

Budgeting

Budgeting is a periodical practice of allocating financial resources into all manners of expenses: production, marketing, payrolls, overhead and the like. In other words, budgeting quantifies the expectation of the revenues and expenses that the board expects to meet in order to align with the organisation’s objectives.

The process typically starts at the beginning of every fiscal year and is based on actual past performance figures and expected profits. At the end of each period, the budget is collated with actual results for better planning in the future.

Forecasting

Setting up a budget can be challenging, and so is choosing the right budgeting method that best fits your business’ model and needs. Here are the some of the most common approaches to budgeting.

1. Incremental budgeting

Incremental budgeting computes a budget by applying adjustments to the preceding period's actuals. The change typically comes in percentage terms and could either be an increase or a cutback depending on many factors, primarily the organisation's needs and situation. To some extent, it helps reflect the growth of the business and changes in the market.

2. Zero-based budgeting (ZBB)

Zero-based budgeting (ZBB) compels businesses to build a new budget from scratch; starting from the baseline of "zero" as the name suggests. People in charge, i.e. analysts, will evaluate and justify every bit of expenses. On this account, this approach is implemented irrespective of the previous period's spending, as opposed to the above-mentioned traditional method of modifying past actuals. 

3. Fixed budgeting

Fixed budgeting is a process of drawing up a fixed budget for a fixed period of time, typically one fiscal year. Once published, this budget remains unmodified despite unanticipated market fluctuations, windfalls or shortfalls that could take place along the line. 

4. Rolling (Continuous) budgeting

A rolling forecast is more dynamic and is more suitable for the turbulent and unforeseen environments that organisations increasingly find themselves in. 

By perpetually budgeting and re-budgeting the future expenses at regular and brief intervals, a rolling forecast could be tweaked and fine-tuned to accommodate market fluctuation, shortfalls, and windfalls that occur unexpectedly.

5. Activity-based budgeting (ABB)

Activity-based budgeting (ABB) calculates the total cost needed to hit the target of the anticipated level of activities (thus its name). 

This method first calls for the identification and thorough scrutiny of all the activities that drive cost. This analysis will then give grounds for allocating resources to achieve the level of activities that was anticipated beforehand.

6. Performance-based budgeting (PBB)

Performance-based budgeting (PBB) is another advanced approach where budgets or funds are associated with specific objectives. 

With PBB, a set of goals or desired outcomes is first set. These objectives will then act as the rationale for the course of activities that the organisation expects to undertake as well as its associated cost. 

By revolving around objectives, that is, the "results" that the organisation wants to achieve, PBB helps build a result-oriented culture.

7. Investment-based budgeting

Shortcomings associated with the traditional budgeting approach can undermine the true value of the process. Budgeting should be less cost-driven and more investment-based, i.e. all forecasted costs of a department should be attached to deliverables—the products and services that department delivers to other departments or to the clients. Doing so will make budget decisions in investment decisions.

In addition to above-mentioned methods, companies can take three other approaches towards planning and budgeting:

• Top-down: The process and guidelines for planning and budgeting are passed down from senior management.
• Bottom-up: Involves collecting proposed budgets from different departments and rolling them up to the enterprise level.
• Combination of the two above: Addresses the downside of each approach and is more likely to be employed by top-performing companies.

How to budget, one may wonder. As your business progresses through its life cycle and as its goals change, you may find that one step or two are needed to add to the budgeting listicle that we offer here:

Step 1: Clearly define objectives and goals

Step 2: Consider financial policies and procedures

Step 3: Update historical assumptions

Step 4: Consider limiting factors

Step 5: Track fund flow

Step 6: Consider fixed and variable costs

Step 7: Employ appropriate budgeting method

Step 8: Gather further information and set the budget

Step 9: Formally issue the budget

To many radical thinkers, the shortcomings of the traditional budgeting approach have made the process unviable. In reality, budgeting still plays a significant role.

Therefore, to neutralise the arguments for and against traditional budgeting, companies should follow six budgeting best practices.

1. Align budgeting to strategy

An advanced budgeting system must have cause-and-effect linkages with corporate goals and objectives.

The Balanced Scorecard (BSC) is a useful alignment mechanism that merges the budgeting and review processes. In other words, it can aid the coordinating functions that budgeting is supposed to perform.

To get the most out of the BSC method, companies should focus less on budget-related objectives and more on BSC-related objectives (e.g., investments in long-term capabilities, customer relationships).

2. Include non-financial performance measures in budgeting

Best-in-class management systems include both financial and non-financial performance drivers in the financial picture presented by the budget. These are high-level Key Performance Indicators (KPIs) that are strongly linked to corporate goals. Once determined, they should be clearly communicated throughout the organisation.

3. Use aggregated budgets to reduce detail

To reduce the detail of the budget, companies can:

• Focus budgeting on major product groups, organisational units, processes and cost types
• Use aggregated instead of detailed budgets to accommodate decentralised decision making
• Allow decentralised leaders to allocate resources to departments and activities under their jurisdiction without the need to document every single departmental expense

4. Use rolling (flexible) budgets instead of fixed budgets

Best-in-class companies adopt the technique of five-quarter rolling forecasts and translate it into aggregated rolling budgets.

Rolling budgets and forecasts:

• Cover five quarters ahead, through the following year plus one quarter
• Once set, they can be updated each quarter. Rolling budgets are set based on rolling forecasts and additional resource allocation decisions
• Get managers away from their year-end focus, which helps to balance short- and mid-term thinking
• As conditions change, companies can seize opportunities or shore up resources

5. Use relative targets to motivate people

Companies should assess manager performance against relative, self-adjusting performance measures. Relative targets help managers:

• Shift their focus away from solely hitting the desired numbers
• Realise and seize growth opportunities without the boundaries set by fixed targets
• Better manage their capacity to beat external competition instead of competing internally for resource allocation

6. Focus on processes instead of on departmental and organisational unit performance

Companies should focus on cross-functional core processes, e.g., streamlining operational efficiencies, instead of complying with the requirements of separate departments. Management can then focus on major cost drivers instead of single cost figures. Again, this will help managers better align budgeting with organisational strategy and foster collaboration enterprise-wide.

Traditional budgeting is argued to have begun about a century ago as a method of managing costs and cash flows. In a perfect world, the three main purposes of traditional corporate budgeting are:

• Coordinating the company’s financial activities and presenting an overall picture
• Communicating financial plans to those held accountable
• Motivating individuals to act in the organisation’s interest

One can easily pinpoint both advantages and disadvantages of traditional budgeting despite it is an indispensable part of some businesses.

Drawbacks of traditional budgeting practices

• Budgets take time to create, making them obsolete as soon as they are published. 
• Budgets focus on short-term financial performance rather than long-term value drivers.  
• Budgets are too expensive to prepare, especially when you take into account the time when the senior management needs to get involved. 
• Budgets are hinged on assumptions which are, more often than not, inaccurate.  
• Budgets encourage employees to achieve financial targets no matter what, risking eroding the ethical foundation of the organisation.  
• Budgets lead to unnecessary spending because managers do not want to see their next year’s budgets getting slashed. 
• Budgets favour a rigid top-down control mechanism, often at the expense of the organisation’s potential.  
• Budgets can cause unproductive behaviours in the organisation from sandbagging to settling for mediocrity.

Beyond budgeting is a movement where organisations seek to overcome the inherent limitations of the traditional budgeting approaches. It represents a new management philosophy which is more agile and adaptable, aiming at eliminating bureaucracy and rigid control mechanisms, empowering people, and promoting transparency.

Who should apply beyond budgeting? 

The beyond budgeting model is well-suited to industries with an accelerating pace of change. Such environment would naturally require a more dynamic and responsive management approach.   

Newly established organisations or those undergoing radical transformations will find traditional budgeting methods hard to implement due to lack of historical data. 

Organisations that embrace kaizen – continuous improvement – are also poised to benefit the most from beyond budgeting. 

Before adopting beyond budgeting

This new management model is not for everyone despite its advantages. Here are 5 things you should consider before adopting beyond budgeting.

• You must be willing to change
• There is no one single solution to your budgeting issues
• Executive sponsorship is important
• Empowerment must go hand in hand with accountability
• You need to figure out what to do with your budgets

Recent research by Anaplan, an expert on modelling and planning finance, sales and operations platforms, states that currently, Asia Pacific’s CFOs are still experiencing difficulties with spreadsheet usages in financial planning and budgeting. In addition, there was a relatively low satisfaction level with the accuracy, timeliness and ease of Excel use for planning and budgeting.

Drawbacks of spreadsheets

One inherent drawback of spreadsheets is that they rely on manual input processes, and hence are error-prone. Once the data is rolled up, top executives can hardly drill down the numbers to the detailed levels and be confident that they are built upon precise, crystal clear data. 

A typical spreadsheet-based system can take up to 30 days or more to complete a consolidation. It leaves you with very little time to do any useful analysis. 

In addition, spreadsheet-based data normally enables backwards-looking analytics only, not the kind of forward-looking information that companies need.

Invest in budgeting software

Errors are not allowed in today’s competitive world because small errors may snowball into big problems. Reliable budgeting software will be of great help in the budgeting process. 

Automating certain tasks during budgeting can make things a whole lot easier, especially when dealing with spreadsheets, paper receipts and entering data. Some advanced budgeting software also allows managers and accountants to work from mobile devices. 

Take advantage of technology and you can see the difference soon if you can figure out what works best for your organisation.

What to look for in a budgeting solution?

An effective budgeting solution can help eliminate a lot of manual effort and ensure accuracy when linking financial statements and allocation routines. 

The key to an efficient budgeting system is to enable the creation of financial and operational plans with: 

• Flexibility: enables the planning process to incorporate multiple scenarios, which is essential as companies move from a short-term towards a long-term perspective.
• Technology: expedites this process by reducing the role of the middleman and empowering business users to expand and maintain their applications on their own.
• Collaboration: creates opportunities for collaboration through web-based access to plans and data in a central data centre. This information can be later used for budgeting, forecasting, reporting, and analysis.

If you are a financial executive with a forward-looking vision, the solution lies in an Enterprise Performance Management (EPM) application. EPM allows you to achieve the single version of the truth, i.e. a source of all real-time, consolidated, and actionable information at your fingertips.

EPM’s predictive analytics allows you to answer the question “What is likely to happen next?” It provides your company with actionable and data-based insights. You can identify trends in sales activities or forecast demand for inputs from the supply chain.

If your company wants better and more accurate data, real-time and future-looking analytics, you really need to consider replacing spreadsheets with an EPM application.

Did you know, a financial professional spends 70% of their time on collecting and validating data, and the lack of collaboration and visibility has turned forecasting and budgeting into an "educated guessing game."

With EPM software like Infor d/EPM, a fully integrated solution suite, the process of financial management can now be automated, which enables businesses to respond faster to business changes and eliminate spreadsheet entirely.

This product suite unites Infor's two next-generation platforms - Infor Business Intelligence and Infor Enterprise Performance Management, to address the "hottest" concerns in businesses today, mainly collaboration, mobility, cloud, and big data.

With in-memory analytics, Infor d/EPM collects real-time data from your source applications and translates it into business insights through a fully integrated solution suite using a common user interface. Each time you make a change, from modifying an order to changing an inventory status, information is updated automatically.

Kempinski Hotels, Europe’s oldest luxury hotel group, currently employs some 24,000 thousand people and operates over 70 five-star hotels and residences across more than 30 countries.

The issue

And a key to the group’s financial robustness is to ensure accurate financial decisions can be made in any location at any time on any device.

“My focus is on ensuring our highly professional finance specialists can be true business enablers and support accurate decision-making and resources planning in the hotels we operate,” said Colin Lubbe, Chief Financial Officer.

The solution

Kempinski decided to adopt Infor d/EPM, a cloud-based budgeting and financial forecasting system. The transition to the cloud means Kempinski’s finance specialists now have an extremely easy-to-use tool that is always accessible via the internet.

The results

Over a period of 5 years since implementation, Infor d/EPM has helped Kempinski improve its financial forecast accuracy by 88%. The number of months not in line with forecast has dropped by 60%.

Cost-effective scalability

Kempinski’s corporate and hotel employees always have access to server capacity that matches the business’ needs. Additionally, both the hotel and corporate web-based modules share the same look and feel.

Increased user involvement

The system’s scalability, accessibility, and ease-of-use are keys to its strong user adoption. Since the initial roll out, use of the system has expanded from 2 to 9 users per hotel, including each hotel’s financial controllers and department heads, as well as regional and corporate staff.

Seamless data integration

With Infor d/EPM, Kempinski can now seamlessly integrate hotel data into worldwide and regional hotel reporting. Transparency and easy reconciliations are achieved as the hotel results flow directly into corporate financial reporting.

Strict adherence to the industry standard

Furthermore, Infor d/EPM provides Kempinski with enhanced financial reporting in compliance with 11th Edition of USALI (the Uniform System of Accounts for Lodging Industry). Thus, the hotel group has been able to streamline its critical processes such as month-end and annual closing, and drafting of the annual or five-year business plan.

Founded in 1947, Dana-Farber Cancer Institute is widely known for its expertise and efforts in helping cancer patients. With one main campus in Boston and four satellite centres located in Massachusetts and New Hampshire, it is estimated Dana-Farber annually directs more than 700 clinical trials at its main campus alone while overseeing nearly 260,000 outpatient and infusion visits.

The issue

Both the Vice President of Financial Planning and Operations at Dana-Farber have complained of the lengthy, slow, out-dated and error-prone system that they were using.

Moreover, managing various types of costs, budgets and expenses across all 5 offices and 35 cost centres have made financial management become a critical issue.

The solution

Of all the options proposed, Dana-Farber chose Infor Dynamic Performance Management (Infor d/EPM) - formerly known as Infor Corporate Performance Management (Infor CPM).

The results

Significantly cut time and cost

Dana-Farber started to see great improvements within months after the implementation of Infor d/EPM. The time required to complete their budget cycle has significantly reduced from five months to just three months.

Cut down paper wastage, be more eco-friendly

Previously, each of the 35 different hospital cost centres of Dana-Farber would submit at least 20 sheets of paper every single cycle.

Easily adaptable system

As part of the expansion plan, Dan-Farber decided to develop a data warehouse system that can link with Infor Dynamic Enterprise Performance Management. In order to ensure the end-solution works properly, Dana-Farber’s internal team partnered with Infor to customise the data warehouse and enable drill down into the data mart.

Positive feedbacks from staff

One of the plus side that the new system brought is providing an Excel-feel so users can get used to it faster without much training required. Employees are now comfortable with explaining any variance as it takes literally just 30 seconds from sign-in to finding needed information from the invoice level and payment.