Global

Finance
360
FINANCIAL BUDGETING
THAT MATTERS
8 TIPS FOR A BETTER BUDGET
Author: Stephen G. Lynch

.
” To achieve Speak with virtually anyone involved with the annual budgeting process and they’ll tell
you that it’s painful: time consuming, difficult, error prone, and based more on politics
maximum value, than on valid economic assumptions. The worst part, however, is that the budget is
viewed as obsolete almost as soon as it’s complete. Despite these challenges, most
managers will corporations are tied to the traditional budgeting process as they don’t believe they
have anything better to replace it with.
need to reinvent
Fortunately there are companies who have scrapped the traditional notion of a budget
their budgeting and have replaced it with something much more useful. They still have a budget, but
their updated budget has been streamlined. No longer do they put themselves through
process to make it the long and difficult budgeting process; rather, they focus on creating a budget that is
far less detailed but that communicates the key ideas of the planning process.
more meaningful.
In leading The Goals of Budgeting
organizations, the The annual budget and the budgeting process serve a number of goals. Among them
are:
financial budget

Link operational plans from multiple departments. The budgeting process,
represents the as opposed to the actual budget, fosters communication and enables the
coordination of business unit and departmental activity across the organization
culmination of an
to support the achievement of strategic plans.
effective process

Capital allocation. One of the key aspects of the budget is to decide where a
that translates company will employ its resources. Strategic plans around new products and
markets, research and development, production capacity and other
strategic dimensions will feed directly into the budget.

objectives and
Performance monitoring. The control of capital and the early detection of
deviations from establish plans have also been key elements of budgeting.
operational plans Reports comparing the variance of actual results from budget are a standard
component of management reporting packages.
into financial

Compensation rewards. Many executives have a portion of their pay linked to
plans.” the attainment of budget goals. The targets established through the strategic
planning process are incorporated into the budget and ultimately into the
annual performance plan for these executives.

The Problem with Traditional Budgeting

Budgeting as a tool can be very useful but the traditional budget is a product of a
th
distant past. During most of the 20 century, manufacturing dominated the industrial
landscape. These businesses were hierarchical and capital intensive. It was the job of
managers to oversee the deployment and allocation of capital. To do so, they needed
strict controls over capital allocations and information to understand how closely they
were tracking to their financial objectives during the year. Couple this with a business

Global Finance 360 | Copyright 2011 | All Rights Reserved 1


About Global Finance 360
Global Finance 360 covers the
world of corporate finance and
accounting and how these
activities are impacted by
globalization. Focus areas
include Finance Delivery
Strategy, Shared Services,
Business Process Outsourcing,
Process Improvement and
Organizational Design.
Global Finance 360 is run by
Steve Lynch. Mr. Lynch is a
Principal in the Finance
Transformation practice of a
global consulting company. He
is responsible for the marketing,
sales and delivery of Finance
Transformation services in North
America and serves as a key
liaison for his company’s global
Finance practice. He brings
more than 15 years of
experience advising global
companies on their service
delivery strategies and has
served over 60 clients in a
variety of industries including
consumer products and
industrial manufacturing,
aerospace & defense,
transportation, technology,
entertainment and financial
services. He has also served as
a Controller in private industry
and as an auditor in public
accounting.
Mr. Lynch is an active content
contributor on the topics of
Finance Transformation and
globalization and has presented
at various forums including the
IQPC Shared Services &
Outsourcing conference. He can
be found on the web at
www.globalfinance360.com.
Contact Information:
Steve Lynch
Toll-free: +1.800.216.2512
Building a Better Budget
Office: +1.719.481.2599
1042 W. Baptist Road
Suite 194
Colorado Springs, CO 80921
slynch@globalfinance360.com
www.globalfinance360.com
environment that was minimally impacted by globalization and it’s easy to see how a
detailed, static budget was sufficient to provide value to management.
Unfortunately, while the world changed the annual planning cycle remained relatively
static. Whereas in the past manufacturing facilities and production volumes helped
determine corporate value, companies today are far more likely to create value through
product innovation, mass customization and agile supply chains. Given the new
realities, traditional budgeting suffers from the following issues:

The traditional budget takes too long to prepare. It’s not uncommon for a
budget to require 4 – 5 months and consume a substantial portion of
executives’ time.

The budget is too manual. Many companies prepare and consolidate their
annual budget in Excel. This increases the time necessary to develop the
budget and exposes the budgeting process to human error as spreadsheets
are manually combined to reflect organizational roll-ups.

The level of detail is too great. Many companies make the mistake of
building too much detail into the budget. This creates far more complexity than
is necessary. Instead of facilitating the budget process, it actually becomes a
hindrance to the creation and monitoring of the budget.

The number of iterations is too high. A typical budget can require 5 - 6
iterations before the numbers are accepted by senior management. Leading
companies focus on minimizing the number of iterations to reduce the time and
effort spent on budgeting.

Budgets are internally focused. Most of the numbers in the budget are
based on previous years’ data. All too rarely is a budget based on existing and
anticipated economic factors that drive volume and cost. Few companies
evaluate their proposed revenue and cost structure based on similar
companies in the industry. Finally, the budget measures internal metrics such
as revenue growth, but fails to take into account other levers of value such as
customer satisfaction.

Budgets lock in costs through the year. While the budget is thought of as a
tool to control costs, all too often costs are locked into the budget for the year.
Even if economic conditions vary widely from the assumptions upon which the
budget was built, the company’s cost structure resists downward pressure as
those costs were budgeted for the year.

Politics permeates most budgets. The annual budgeting process has
become a high-stakes game of bluffing. Many managers “pad” their budgets
with extra costs so that they end up with something they envisioned after their
budget requests have gone through multiple iterations.

The budget is quickly obsolete. Given that the budgeting process can start
four or more months before the end of the fiscal year, and coupled with a
dynamic business environment, it’s no surprise that many budgets are
obsolete after the first month of the fiscal year.
Given the challenges in the budgeting process, leading companies have moved to a
new budgeting paradigm that emphasizes speed and flexibility. Here are eight ideas to
incorporate into the budgeting process:
Global Finance 360 | Copyright 2011 | All Rights Reserved 2
About Global Finance 360
Global Finance 360 covers the
world of corporate finance and
accounting and how these
activities are impacted by
globalization. Focus areas
include Finance Delivery
Strategy, Shared Services,
Business Process Outsourcing,
Process Improvement and
Organizational Design.
Global Finance 360 is run by
Steve Lynch. Mr. Lynch is a
Principal in the Finance
Transformation practice of a
global consulting company. He
is responsible for the marketing,
sales and delivery of Finance
Transformation services in North
America and serves as a key
liaison for his company’s global
Finance practice. He brings
more than 15 years of
experience advising global
companies on their service
delivery strategies and has
served over 60 clients in a
variety of industries including
consumer products and
industrial manufacturing,
aerospace & defense,
transportation, technology,
entertainment and financial
services. He has also served as
a Controller in private industry
and as an auditor in public
accounting.
Mr. Lynch is an active content
contributor on the topics of
Finance Transformation and
globalization and has presented
at various forums including the
IQPC Shared Services &
Outsourcing conference. He can
be found on the web at
www.globalfinance360.com.
Contact Information:
Steve Lynch
Toll-free: +1.800.216.2512
Office: +1.719.481.2599
1042 W. Baptist Road
Suite 194
Colorado Springs, CO 80921
slynch@globalfinance360.com
www.globalfinance360.com

Establish key linkages between the strategic plan, the Sales &
Operations Plan and the financial budget. The numbers in the financial
budget should be the culmination of a planning process that begins with the
strategic plan and incorporates demand and supply plans from Operations.

Scale down the budget. Reduce the number of line items budgets to focus
on the true drivers of revenue and cost. It isn’t necessary or desirable to
create a highly detailed budget. Focus on key line items that are material and
that are derived from supporting operational detail.

Automate the budget with a dedicated software solution. Reduce reliance
on Excel spreadsheets and manual consolidations. Invest in a dedicated
software solution that provides a web-based interface for users, workflow,
security and that automatically rolls up budgets at each level of the
organization. These software packages also facilitate the reporting of actual,
budget and forecast data.

Employ zero-base budgeting. Don’t use last year’s numbers as a base for
the upcoming year. It’s too easy for managers to simply resubmit their
numbers without going through the exercise of determining costs based on
estimated activity volume.

Document budget assumptions (e.g. growth rates, estimated activity
volume). Just as footnotes are an integral part of financial statements, the
assumptions made to develop a budget are also critical. Assumptions must be
realistic or the budget will lose credibility.

Foster dialogue across functions. The process of budgeting, if done
correctly, can add as much or more value as the budget itself. When
departments work together on an integrated budget, they gain a better
understanding of the challenges facing the overall organization. Strong
communication leads to more useful budgets.

Move compensation goals from a static budget to a series of balanced
KPIs. Yes, some will still be financial in nature and a streamlined budget can
capture those. Revenue, Gross Margin, EBIDTA, Return on Invested Capital
can all be measured against pre-established targets. But managers should
also be evaluated on non-financial factors such as product innovation, time-to-
market, employee satisfaction, customer retention and customer satisfaction
ratings.

Allocate capital based on a dynamic forecast rather than on a static
budget. In most industries business events occur too quickly to depend on a
static budget for capital allocation. Leading companies use their forecast to
identify emerging market opportunities and enable them to respond more
quickly to those opportunities.
Conclusion
Budgeting still matters, but to obtain the greatest value from the budgeting process,
companies need to adjust to the present realities. By following tips outlined above,
companies will produce more meaningful budgets with less effort and cost, freeing up
time and management attention to focus on creating value in their businesses.
Global Finance 360 | Copyright 2011 | All Rights Reserved 3