Annual Budgeting Process, Planning and Best Practices

All companies have to prepare annual budgets, but many don’t understand the real purpose behind the exercise. If a budget fails to influence and promote behavioral change across an organization, it remains a work of fiction, imposed from above and adopted with varying degrees of resignation or cynicism.

The budget is a blend of art and science. It needs to tell a compelling story for people to believe in it and reflect that with their behavior. During budget season, the finance team’s efforts quickly get stuck in the weeds of spreadsheet overload, and the real story is lost.

There is a better way of building a budget to reflect the company’s priorities, stimulate growth, and encourage employee engagement. That’s what we’re offering here: the opportunity to get back to basics and rethink budgeting (as well as other fundamental financial processes we’ll discuss over the following weeks).

Giving more responsibility, getting more accountability

The most effective annual budgets are both operational and financial, rather than an arbitrary, top-down, purely finance-driven exercise. They make the budget process transparent and accessible to all involved. This organizational alignment ensures that departmental leaders have ownership of their segment of the plan, know how the overall budget affects them, and, as a result, gain a clearer vision of both tactical and larger strategic goals.

The results of getting the budgeting approach right are that businesses become more efficient, waste less time on spreadsheet manipulation, and operate more cost-effectively. When the budgeting process transitions from overly focusing on the accounting perspective to being about the real drivers behind the business, then the departmental heads feel more inherent responsibility and ownership toward the numbers. And beyond these intangible benefits to morale, people who feel more like owners will show more accountability to deliver on those numbers.

For management, mastering the basics of budgeting will better position them to make decisions that can increase revenue, decrease costs, and improve free cash flow and working capital.

Bring your lines of business into the budget process early

A former boss of mine liked to say, “nobody went to budgeting school.” Below, Nadine Pichelot, VP of Finance, EMEA at Anaplan, shares her perspective on how to get the most out of the budgeting process. Pichelot previously spent more than 20 years as a finance leader and CFO at several companies. She has managed teams using budgeting methodologies of all types, including zero-based, top-down, and bottom-up budgeting.

Pichelot observes that the best budgeting processes start at the top, with business leaders thinking through the commercial and operational drivers that influence their financial plans. Key considerations include market size, projected growth or decline in market share, demand shifts, cost inputs (raw materials, employee costs, transportation, advertising, and more), competitive pressures, and the regulatory environment. You also build in the company’s high-level goals for the year (and looking ahead to future years).

It’s important to reach out to the operational departments and regions to find out their budget expectations for the coming year, and balance those bottom-up projections against the top-down goals. Bring the departments into the budgeting process as early as possible, Pichelot says: “Finance should take the lead, but finance needs the operational departments involved… or you have only a partial process.”

Of course, even in prosperous times, no budget can satisfy everyone’s hopes. You can’t blithely assume that, say, the manufacturing output will go up 10% across the board without buying replacements for outdated equipment. Or that every project on R&D’s wish list will get funded. Involving the leaders from these operational departments gives everyone more perspective. Executives gain more realistic expectations in relation to the productivity of their workforce. Line-of-business heads get a better sense of how much (or little) new funding is up for grabs. Those operational managers know they’ll have to make trade-offs, but they’ll be more accepting of the results when they see the assumptions that went into them and have a voice in how they are shaped.

Make smart trade-offs

This kind of collaboratively validated budget process relies on everyone working off a single set of numbers and expectations. “If you don’t have a budget process that makes sure you start out with shared assumptions, working from a single source of the truth, it ends up wasting a lot of time,” Pichelot cautions. “You spend a lot of time chasing down facts or settling misunderstandings. And then you’re not really spending the time where you should be, which is working with your functional leads.

“For example, my chief development officer should only be focused on questions like, ‘How do I get the budget to cover my new R&D projects and my product development?’ And all my sales director should be worried about is ‘How will you fund my sales force? How will you make me more productive?’” A transparent, efficient budget process will let these executives make their cases for funding, or else accept prudent trade-offs. Discussing how to allot your resources is worthwhile when it keeps you aligned to larger corporate priorities, Pichelot explains.

“[With an inefficient budget process,] you’re spending all your time reconciling data – saying things like, ‘Oh, by the way, I need to take away half a million here to fill a hole of half a million in another department,’ which shouldn’t be the case. You end up doing stupid trade-offs.”

Spreadsheet chaos versus a single source of the truth

This brings us to the biggest hindrance in annual budgeting: manual, spreadsheet-driven processes. Some of the world’s largest, most successful companies still rely on sending around copies of spreadsheets for lines of business to fill out and the finance team to reconcile. That’s a huge waste of time, Pichelot says.

“Spending hours and hours reconciling numbers in leadership meetings – that has happened to me! Someone will say, ‘I entered that number, so I know it’s right.’ And someone else will reply, “Oh, no. You’re working off the wrong assumptions. Which cells did you change?’ Sometimes they won’t even remember what figures they changed.”

In fact, each spreadsheet is a potential point of failure. Over weeks and months, errors accumulate. Links break. Version control issues increase with time. There’s no real-time visibility into performance against objectives. By the time information is communicated across the business, it’s out of date.

No wonder the annual budgeting process can take three or four months, sometimes even five, to complete, when it’s hampered by outdated technology.

“When I joined Anaplan, of course we used our own software platform for our internal financial planning processes. I saw how much faster and more efficient it is when everyone has access to the same set of data, on a shared platform,” Pichelot says. “For example, there’s a built-in audit trail, so you’re not spending time tracking down which figures got changed. And you can easily view all the KPIs – not just financial ones but operational indicators like contract renewal rates or staff hiring and attrition rates.”

This offers benefits beyond making the process faster and more accurate, she points out: It helps the budget better reflect the company’s overall strategy. “Even if you have an efficient budgeting process, it can defeat its own purpose if you haven’t listened to your operational leaders and assigned the right funding priorities to the various functions. Finance shouldn’t be acting in a vacuum. It plays a role in gathering information and setting the cadence, of course. But it should also be fostering a more thoughtful budget process across each department.”

A budget built to support business growth

Part of that more thoughtful process, Pichelot adds, is offering the flexibility to reflect changes during the budgeting cycle, whether due to executive priority shifts or the external shocks that came all too often in 2020. Even a final, approved annual budget isn’t meant to be a pair of handcuffs. Rather, it should point out a clear direction of travel for the next 12 months, ensuring that employees are accountable to the plan and motivated to deliver on its objectives.

With that kind of process in place, the annual budget becomes less “spreadsheet fantasy” and more a realistic foundation for business growth.