4 Tips for High-Impact Budgeting and Forecasting

  • By AFP Staff
  • Published: 4/30/2024

High-Impact Budgeting and Forecasting HeaderHigh-impact finance functions have sound accounting architecture, implement proven finance processes and methodologies, and provide people with the appropriate tools to succeed. So say the experts John Baule, CEO and Co-founder of FutureView Systems, Keith Haas, CFO of FutureView Systems, and Jen Murphy, Controller, ACA Compliance Group, in one of our most popular sessions from AFP 2022.

With these workflows in place, we can elevate our finance functions to higher levels, such as being proactive, planning for multiple scenarios, infusing strategic conversations with actionable insight, and driving accountability and decision-making. But how do you get to that level? How do you create such a system? Read on for four actionable tips to help you get started with high-impact budgeting and forecasting.

1. Connect your accounting infrastructure and your budget framework.

Baule starts with the analogy of a scoreboard at a game. “Everyone understands those rules before the game starts; you can’t design your rules and scoreboard in the middle of the game,” said Baule. “And business is no different.”

However, there is a lot more to a scoreboard than just the numbers you see on the face of it. Underlying every one of the numbers you see is a defined calculation that’s been thought through. If a controller is recording information in a way that doesn’t make it accessible to an FP&A group — for example, if they’re recording expenses but not including vendor data in the expenses or reporting at the business level when FP&A wants SKU level — it creates extra effort or assumptions for FP&A to translate the results, analyze them and create a basis for forecasting. Additionally, they will forever work to reconcile the numbers!

On the flip side, if FP&A builds a forecast on a foundation of data that doesn’t reflect the actuals that have occurred to date, then the forecast is not very meaningful and difficult to act on. Maintaining that synchronization between everything that's happened as recorded in the general ledger and usable by FP&A and business leaders is vital.

There are six capabilities that are critical for an effective finance and accounting function. The first three describe good accounting and controllership hygiene:

  1. Close the books in a timely manner.
  2. P&Ls drive business unit accountability.
  3. Automate manual, error-prone processes.

The next three describe how you leverage accounting information to drive the conversations within the business and influence decisions with data:

  1. Develop a clear analytical framework (a structured approach to analyze financial data, interpret information and make informed decisions).
  2. Track performance against the budget targets.
  3. Follow a regular, iterative forecasting process.

A responsibility matrix is one way to align accounting transactions with your business functions and create accountability. Each department’s accounting transactions include all the expenses for each employee, consultant and vendor related to that department, assigned to the appropriate expense type. Each transaction has a who (the owner and approver), a where (the department) and a what (the expense type).

2. Identify, collaborate and communicate a clear process for accountability with budget owners.

“Budgets get a bad rap,” said Haas. As the finance and accounting leader, you’re at the center of this process that requires the orchestration of many people across different departments. Think about what is required for process excellence. “I find that the best budget cycles start with a calendar where all the meetings are scheduled at the beginning, so everybody is clear on the timing and what’s going to happen next.”

Finance does not own the budget — that should be a shared responsibility among business leaders. Instead, finance should manage the process and impact the outcome. Finance is responsible for communicating assumptions, timing and requirements and listening to ensure that participants understand each other and the message, which may include clarifying terminology, definitions and terms. This collaborative approach gives budget owners an opportunity to provide their expert input while accepting responsibility for the targets they helped set in the annual budget.

“Budgets need to be collaborative,” said Baule. Otherwise, when targets are missed, department leaders will simply deny any understanding of the budget. A collaborative process, managed by finance and architected by finance, will ensure you have realistic budgets and help prevent sandbagging.

3. Align executives and the team with high-level targets for the upcoming budget.

A high-impact budget process aligns senior management and the board with a common goal and drives accountability throughout the business. However, according to Baule, there are three major reasons why budgets fail. The first is if your budget is a finance-only exercise. If the rest of the organization never buys in, that kills the accountability element.

The second reason is if executive leadership, such as the board or the CEO, only quasi-accept the budget, meaning they just want to get it done, but they don’t believe in it or think spending should be allocated as it is in the budget. That kills the idea of having a compass.

The third reason is if your budget turns into a massive data collection exercise where spreadsheets fly back and forth willy-nilly across the organization. All three of these are the opposite of executive alignment!

A collaborative process, managed by finance and architected by finance, will ensure you have realistic budgets and help prevent sandbagging. Haas recommends a hybrid approach that combines top-down and bottom-up budgeting. The first step is to get buy-in from the top: the CEO and board. Second, benchmarks should be set to provide a starting point from which to work.

“Benchmarking can help set objective performance standards for the upcoming year,” said Haas. It allows you to bring in an outside perspective and focus some of the discussion, such as where you want to be relative to your peers, and use that data to set targets for all of your key metrics, e.g., revenue, growth margin, EBITDA, sales efficiency and customer satisfaction.

Third, the finance team must work with business partners to build a detailed plan and present it internally for debate and approval.

Finally, anticipate and prepare for the board’s questions before submitting the presentation for board approval. Compare it to the original proposed budget and preliminary targets, and always include quantified opportunities for upside and execution risks.

4. Leverage robust tools to operate your budget and forecasting processes efficiently.

Today, we’re fortunate to have integrated reporting and forecasting tools available. These tools provide much greater efficiency, eliminating errors and delivering accurate and informative insights.

They also make collaboration much easier, allowing for distribution outside of finance, so everyone is working on “one sheet of music,” said Baule.

Purpose-built FP&A tools shine in terms of customization, centralizing multiple data sources, and generating effective reports and metrics, while ERP systems can handle and account for transaction details with ease. In short, there are many benefits to employing these technologies.

“Organize your data, clarify accountability across the company, improve efficiency, and then run that collaborative forecasting process with your business leaders, and you will make an impact,” said Baule.

Read More About Budgeting and Forecasting

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