Maybe you love it, maybe you hate it--or maybe you don't know what to feel. Whatever the case, like death and taxes, there's no avoiding it. Corporate budgeting is a key finance function--and a successful budget helps drive a successful business.
But whether your company budgets annually or on a more frequent cycle, there's no reason to dread budgeting season--not if you have the right process in place. The best corporate budgeting process for your company will depend on your organizational culture--and when it's aligned closely to strategy it will elevate your budget from "something that needs to get done" to a driving force for your business. In fact, when approached in the right way your budget has the power to bring your organization together, connect dots and eliminate silos--putting finance at the heart of everything your company hopes to achieve.
Continue reading to explore different approaches to budgeting and how to make your corporate budgeting process a success.
Your corporate budget is key to enabling your business operations and executing growth.
When built around your organizational strategy, it's the tactical side of your business plan, ensuring resources are allocated in a way that sets your business up to operate effectively, meet its growth goals and keep up with ongoing market demands. To accomplish that, a corporate budget is made up of a series of lower-level budgets--including revenue forecasts, expenditures, working capital, cash-flow forecasts, financing needs, etc.--that all roll up into a single master budget. You can use a corporate budgeting software to help you accomplish the task.
By aligning the budget to your strategic business plan, you ensure it consistently meets the needs of your organizational objectives. And that moves it away from just the administrative task it's often been considered to become an integral part of your strategic planning process--and part of the operating plan that will drive your business forward to future success.
Ideally, the budgeting process for a company begins with a clear view into strategy and objectives. Without that visibility, it's tough to ensure your corporate budget meets all of your organization's needs, with the right resources to facilitate programs, people and initiatives across departments. That's where budget alignment comes in.
Aligning your budget with your business strategy and KPI and goal setting is critical to success--and the more your finance team is involved in your business strategy, the more organic that alignment becomes. But even when finance doesn't have a seat at the table, the best corporate budgeting process will keep them in the loop on organizational strategy and goals.
To accomplish budget alignment follow these three steps:
| Step | Tactics |
| 1. Keep your eye on the long term |
|
| 2. Get your leaders involved early |
|
| 3. Measure your success and repeat it |
|
Aligning your corporate budgeting process with your overall organizational strategy is the first best practice of budgeting. But that's just the start. There are other ways to also ensure you have a successful budget that empowers business growth and helps your departments meet their individual goals.
Consider four best practices for making your corporate budgeting process successful.
Disparate and disconnected data is one of the top challenges faced by finance teams today--and that can become a very real pain during budgeting season.
Data is critical to the budgeting process, allowing you to understand what drives performance, what's contributing to organizational 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 and industry conditions along the way. So connecting your data and being able to access clean, current data will in itself build a better corporate budgeting process.
Traditional budgeting uses your past performance and historical data as a starting point to inform your current budgeting process.
Historical data is also critical for predictive budgeting and for understanding what drives your business growth. No matter what budgeting approach you take, though, don't lose sight of that historic view.
Comparing actual performance to past performance will allow you to better predict future performance, just like comparing your rolling plan to your longer-term strategic plan will let you see where you need to make adjustments in order to get to your goals. Model scenarios using that past performance data to understand the potential effects of your budgeting decisions.
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. And remember that non-financial metrics can be just as critical to your organizational performance--and your budget--as financial drivers. 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.
Finally, having some agility built into your budgeting process will empower you to make tweaks whenever the market or your business requires--ensuring you have the resources available no matter what. 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 you need to.
Your master budget is a sum of all of the parts that make up your business, including the budgets of every individual department and every revenue and spending consideration you'll need to make. The department, program and line(s)-of-business budgets feed into your master budget to inform how resources are allocated company wide.
So how do you do that successfully, so that every element of your business is represented in your consolidated budget? Consider some do's and don'ts for preparing a successful master budget:
Collaboration is key. For your master budget to be successful it's going to need input from across the organization--from your department managers to your executive team. You'll rely on them to provide the information you need to determine the people, programs and initiatives integral to achieving your organization's goals--and to help you decide where resources should be allocated so that every piece of your business is equipped to contribute to its success.
Gathering all of those contributions into a master budget requires a detailed budget calendar that will keep it on schedule. After all, getting to the finish line on time means keeping your process--and all of the people involved in it--on track. Missing something or someone could mean a project, program or team doesn't end up with the resources they need to make your final goals a reality.
You'll need a process by which data is handed off between stakeholders, models to be used by each different part of your organization to ensure everyone contributes their unique information and a method to pull everything together.
Use your master budget to measure your company performance and ensure you're allocating resources in the right way. By comparing budget or forecast data with past performance through financial reporting you'll better understand whether you're on track with company goals.
Preparing a successful master budget, then, is all about people, processes and tools--as well as the data that underlies all of them. By collaborating across teams, having the right processes in place and using technology to connect data from different formats and across sources, you can create a single version of the truth and ensure a connected, comprehensive budget that takes into consideration every part of the business.
Will you start your budget from the top-down or take a bottom-up approach? Most types of budgeting fall into one category or the other.
While neither model is inherently better or worse than the other, they each take a different route to budgeting success--and each have their own pros and cons.
| Pros | Cons | |
| Top-Down Budgeting |
|
|
| Bottom-Up Budgeting |
|
|
The best approach for you will depend on your organizational culture and whether teams prefer to build their own ideas from the ground up or let leadership guide them. It may even vary from year to year or from budget to budget, depending on the specific goals your business wants to achieve.
Finally, some finance teams choose to approach their budgeting from both directions--with a longer-term plan taking a top-down approach, for instance, and short-term budgeting using a bottom-up model.
As a way of ensuring your budget remains aligned with current financial performance and priorities, zero-based budgeting (ZBB) makes "zero" its starting line. While traditional budgets rely on your current year's budget as a jumping-off point for the new year's budgeting cycle, ZBB takes a different approach, wiping the slate clean every time.
With traditional (or incremental) budgeting, certain expenses are fixed, while deeper analysis is reserved for new expenses. This can help to quickly seed your plan, but also means you potentially miss out on changes to your business operations, as well as possible cost savings and investments that might help your organization evolve.
ZBB, on the other hand, can promote transparency and a holistic, organization-wide view, while giving departments an incentive to look for potential cuts. Every expense is connected to ongoing financial performance and company goals, and new and ongoing expenses are examined with the same level of scrutiny to see where funding should go.
By starting at nothing every time, ZBB makes sure every expense is connected to ongoing financial performance and aligned with company goals--an approach that can have both advantages and drawbacks.
With the right organizational culture in place, zero-based budgeting can help you move your planning process and decision making forward. But of course, zero-based budgeting isn't the only option--there are several ways to approach your budgeting, depending on your goals.
What drivers are influencing your business? And how will your budget empower your long-term goals? Driver-based budgeting and predictive budgeting take those questions and center your corporate budgeting process around them. In doing so, they can help focus your budgeting on the things that matter most--and allow you to remain sensitive to what's contributing to your organizational success.
Every business has its own unique drivers--both internal and external. Traffic, demand, interest rates and even--in some cases--the weather outside, can all help drive the success of your business in any given year.
Driver-based budgeting (DBB) takes those critical drivers into consideration, tying the drivers most likely to influence performance directly into the budgeting process. By doing so, DBB gives you long-term visibility into how those drivers affect your company's strategy and goals, using a rules-based approach to focus your budget around strategic objectives and tell a story as to what contributes to your organization's performance and how.
To accomplish that, DBB looks beyond your line items to the data underneath--identifying what's driving your performance, good or bad, how those drivers correlate with the resources you're allotting and who's accountable for them. That goes beyond financial, taking into consideration non-financial drivers too and incorporating them into your budgeting process. It also includes both internal drivers and those external to your organization.
Some examples of internal and external drivers include:
| Internal Drivers | External Drivers |
Traffic |
Market size |
| Demand | Market changes |
| Market share | Competitor market share |
| Number of customers | Buying trends |
| Sales volumes | Interest rates |
| Sale price | Regulatory requirements |
Unlike traditional budgeting, which starts with a line item and works its way backward, DBB begins with an operational driver and ends with its financial outcomes--allowing you to look at the business activities and resource requirements needed to accomplish those goals and directly allocate towards them. In doing so, it links your budget items directly to the people and resources connected to them.
A driver-based process can help you align and focus your budget and provide you with insights that let you make decisions more efficiently and keep your executive team informed. But it can also get complicated the more complex your organization is and the more key drivers you have in play--and may mean a shift of focus for your individual teams. Introducing it successfully takes executive support and a clear line of sight to the data you require.
But with those in place, DBB can help you open up visibility into company performance--and help you better understand what it'll take to keep building towards success.
Learn about how to apply driver-based budgeting to your business.
Often used as a system of oversight, predictive budgeting relies on predictive analytics to aid the corporate budgeting process and help ensure long-term alignment with strategic goals. It often lives outside of your traditional budgeting process, and is used as a way to check yourself and ensure your budget is on track with organizational objectives.
Predictive budgeting lets you create intelligent drivers or ranges of possibilities by drawing on broad sets of data, leveraging statistical algorithms and applying machine learning to look into the future--determining potential short- and long-term outcomes through the application of historical data. In doing so, it allows you to better understand your budget's potential flaws: where it may not align with your organizational goals, when department managers might have added extra padding into their resource requests or opportunities you might have missed to support your business's key drivers.
Predictive budgeting can also help to:
But as the next frontier in planning, successful predictive budgeting relies on a specialized team member or extra training for your existing team to get right. The right data is also critical--including, ideally, at least a few years of historical data--as well as the technology that will allow you to access that data across disparate data sources and apply modeling and analytics to see what the future holds.
With all of that in place, though, predictive budgeting can help you build a better budget and layer data-driven storytelling into your budgeting process. It can also reduce inefficiencies and ensure long-term budget alignment with your strategic goals.
Just as important as staying ahead of your budgeting needs is ensuring your budget is keeping up with ongoing performance. Rolling forecasting can help with that.
By adding and dropping a week, month or quarter every cycle, a rolling forecast always has a view into the future, letting you look 13 weeks, 12 months, four quarters or 18 months into the future at all times--whatever makes the most sense based on the business process or planning outcome to which it's being applied. In that way it differs from a traditional static budget, which is tied to a fixed timeframe.
By working on a moving timeframe, rolling forecasts help maintain visibility into recent performance while better projecting future needs, allowing you to remain agile to new trends and requirements while continuing to move the planning horizon forward. This is specifically useful if you're at a high-growth company, have to make medium- to long-term commitments like hiring decisions or inventory purchases, or need to keep up with an ever-changing industry.
But rolling forecasts can also work alongside more static budgets, incorporating elements of both so that rolling forecasts become an extension of your annual budgeting process. They may be introduced as a process of review at regular intervals to keep up with current performance and changing market conditions--or may be applied only to certain areas, like revenue or cash planning, with a more traditional approach used elsewhere.