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  • Baptiste Bassot

Finance can help lead the business with budgeting and planning



Instead of considering the budgeting process a rote exercise or an operational hurdle, CFOs and their companies can use it as a significant opportunity. This is now of greater importance given the impact of the COVID-19 pandemic. Those CFOs who are able to successfully transform legacy budget and planning processes can act quickly when faced with change, increase visibility into their company’s financial health, and better manage the bottom-line profits.

Tough!

So how can CFOs shift the budgeting process from an obstacle to an opportunity? Here are four approaches that can help make the budgeting process simpler, less time-consuming, and more aligned with the corporate strategic objectives of the executive team.


Read the eBook: Learn four approaches to making the budgeting process simpler, less time-consuming, and more aligned with targets. Find out how CFOs can take the lead in reinvigorating budget discussions, setting targets for continuous improvement, and leveraging rolling forecasts to perform more-effective business analysis.


1. Challenge the status quo

It’s human nature to be averse to change, especially when it comes to high-stakes and highly stressful activities like budgeting. This is why the annual budget process tends to follow the same approach year after year—compare last year’s actuals to this year’s projections, develop revenue targets to support corporate objectives, collect manager numbers and budget requests, and so on.

Maybe this is why, according to an ACPQ survey, only 40% of finance executives surveyed rated their FP&A capabilities as effective. And why these same executives reported that their finance teams are always swamped by basic financial management duties such as reporting last period’s results, leaving little time for scenario modeling or testing budget assumptions related to the future.

Challenging the status quo is no easy task. To do this, CFOs need something equally compelling that motivates people to adopt newer, more effective methods and processes.


2. Set targets for continuous improvement

Continuous improvement is one way to help motivate people to take a new approach to budgeting. Simply put, continuous improvement is the idea that setting targets for improvements in performance should happen on a continuous basis. Most people would agree that assessing performance against targets shouldn’t be a one-and-done exercise. In reality, it’s common to use the budget as a benchmark to measure progress against plans. The budget then becomes an inflexible fixed contract with managers steering in a direction that will be hard to change, even when faced with unexpected events such as the COVID-19 pandemic.

When the annual budget is the benchmark to gauge improvement, it gives an incomplete, outdated picture of the overall holistic plan. So much is at stake—bonuses, compensation, hiring—that it’s easy to see why managers are incentivized to set up attainable, rather than aspirational, goals.

When improvement is measured against these kinds of targets, it’s difficult to identify whether a jump in profits is actually due to one’s company performance or to a competitor going out of business. Or whether a decrease in revenue is due to an emerging competitor with a popular product or service line. In both cases, is this a true reflection of overall performance?

Targets set for continuous improvement are assessed on a rolling basis, derived from a combination of factors, rather than targets defined to look like success. A complete measure of performance should include a picture of revenue growth and profit margin improvement as well as cash flow, competitive landscape, and employee productivity. The COVID-19 pandemic brings increased attention to net cash flows because companies may be experiencing financing challenges rather than the surplus cash they had been expecting.

The CFO can take the lead in encouraging a culture of continuous improvement and ensure targets are set so that all aspects of performance are taken into account, not just performance against the annual budget.


3. Keep performance targets top of mind

Overseeing annual budgeting and planning and generating buy-in for continuous improvement is only part of the challenge. CFOs also have to keep their eye on the prize all year—often long after everyone has packed up their budget notes and gone home. For those outside of finance, putting out fires and managing day-to-day operations make it difficult to be motivated to review budget numbers created months ago.

Scheduling plan review meetings with stakeholders is one way that CFOs can keep budget goals top of mind. With regular check-ins, reminders about continuous improvement, and a broader commitment to ongoing planning, CFOs can add significantly to executing the strategy and navigating new directions of the business.

Organizations increasingly expect CFOs to offer strategic guidance., but it flows both ways. CFOs need FP&A teams to spend more time on strategic tasks. By increasing communication around performance, following the midyear plan, and keeping performance targets top of mind for leaders throughout the organization, CFOs can help encourage a high-achieving culture, with greater buy-in and better results.

Use rolling financial forecasts to identify challenges and opportunities

Transforming the budget and planning process is easier when CFOs and FP&A teams implement demand-driven rolling financial forecasts. Unlike annual forecasts, rolling financial forecasts occur more frequently and focus in on key business drivers, rather than every expense line item in the general ledger accounting system. This involves modeling.

Because they’re more frequent and more focused, rolling financial forecasts serve as an early warning system and can help identify needed course corrections before they become emergencies. CFOs and their teams are able to offer analysis and insights as opportunities or threats arise.

The data backs this up. According to the APQC, 94% of businesses that use rolling financial forecasts described their business analysis as effective. Only 50% of those that do not use rolling financial forecasts described their analysis that way. The bottom line is that rolling financial forecasts help an organization stay agile in the face of volatile market conditions.


4. Transform budgeting and planning

CFOs might not view themselves as mediators of change. Yet they’re uniquely qualified to challenge the status quo. By implementing progressive budgeting methods, getting buy-in from managers, and improving budget alignment with comprehensive targets, CFOs can ultimately influence better business decisions. This is critical for the post-pandemic business recovery that every organization will experience.

All of this works together to help organizations align their managers’ actions and priorities with a broader strategy. It gives CFOs the time and resources they need to perform deeper analysis and help turn the budgeting and planning process from an obstacle to an opportunity.


Read the eBook: Making the Shift: Four Secrets Behind Great Budgeting and Planning

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