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Approaches and trends in planning, budgeting and forecasting

Posted by Rick Yvanovich on

Uncertain economic conditions have resulted in more informal and ad-hoc planning, budgeting and forecasting processes than before the financial crisis. According to data from a study by Aberdeen Group in 2011, although 65% of the surveyed companies have a formal planning and budgeting process, the figure is less than the 76% recorded back in 2008.

planning budget process and trends
The four most common budgeting methods are:

  • Historical budgeting: Mostly dependent on reports of prior budgets and performance against those budgets.
  • Performance-based budgeting: Driven by expected changes to the business for which performance metrics have been established. These changes can include new initiatives or added resources.
  • Driver-based budgeting: Involves the selection of one or more basic drivers of the business upon which the budget is based. e.g. for a school the driver could be number of students enrolled on a course or for a power hungry business the cost of electricity per Kwh.
  • Zero-based budgeting: Assumes there is no performance history and that there are no predictions for future performance. To establish a baseline commonly associated with industry norms and performance expectations, this method is used alongside external auditing/consulting services.

Aberdeen Group has pointed out top performing companies’ shift away from simply basing budgets on historical data; however, overall, historical budgeting is still the most common method.

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.

According to the Aberdeen Group’s research, although the percentage of best-in-class companies using the third approach took a dip after the financial crisis in 2008, it picked up with early signs of economic recovery in 2011 and is now at 57%.

Read the full report “Financial Planning, Budgeting and Forecasting in the New Economy” to discover what top performing businesses are doing to stay ahead in the game

Download the Aberdeen Report  "Planning, Budgeting and Forecasting in the New Economy"

Topics: Planning and Budgeting, Financial consolidation, planning and reporting, Enterprise Performance Management (EPM)

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 Rick Yvanovich
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