Ten Steps to Elevate the Annual Budgeting Process

What’s new: The annual budget process can be more than just a routine financial exercise.

Why it matters: Setting strategic direction, allocating resources and establishing goals for the upcoming year can elevate the process to one that can be leveraged to guide financial and strategic decisions and allow an organization to adapt to a continuously changing landscape.

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Annual budgeting season is upon us again. While this is a time-consuming effort across an organization, it is necessary to set strategic direction, allocate resources and establish goals for the upcoming year.  Specific budget requirements may vary across companies depending on size, complexity, industry, etc., but challenges in navigating market volatility, economic shifts and evolving workforce dynamics remain consistent.

With this in mind, companies should consider the following top 10 list of best practices in the annual budget process for the upcoming year.

1. Lead with strategy — The annual budget should reflect an organization’s overall strategic objectives. Budgets are often developed by financial planning and analysis (FP&A) in isolation and do not incorporate overall strategic plans. Connecting the strategic planning process to long-range financial planning and the annual budget is critical to ensure that resources are properly allocated to achieve strategic goals and long-term growth.
2. Set targets early in the process — The top-down, long-range financial plans that have been aligned with the long-term strategy should be used as a basis to develop annual budget targets. Establishing and communicating clear, specific and measurable targets at the onset of the process will help establish appropriate guardrails upfront. This allows for alignment of top-down guidance with bottom-up input from individual business units.
3. Learn from history — Routine analysis of financial performance versus budget and forecasts provides valuable insights and may be used to establish a baseline for the annual budget. By analyzing historical data, FP&A may identify recurring trends, including seasonality, to inform revenue forecasts, expense allocations and resource planning, as well as reveal potential risks to be addressed in the budget process.
4. Leverage cross-functional business partnerships — It’s critical for FP&A to establish strong business partnerships at all levels across the organization to drive a cohesive annual plan. For example, collaboration between FP&A and human resources (HR) is essential for effective workforce planning and to ensure staffing plans align with financial goals and business strategies. Ongoing business partnerships also can help identify and size up potential risks and opportunities that could impact the achievement of goals, enabling proactive strategies and contingency plans to be developed alongside the annual plan.
5. Evaluate options through scenario planning — To help business leaders navigate an accelerated pace of change, including market volatility, economic shifts and evolving workforce dynamics, scenario planning should be leveraged to proactively identify actions that could be taken when potential circumstances arise. The scenarios selected to analyze should have a significant potential impact on the business and related business drivers; therefore, it is critical to analyze internal and external data and trends likely to affect the business both from a qualitative and quantitative view. Analyzing scenarios around uncertainties, assessing the potential impact of such scenarios and developing strategic alternatives should not be a one-off exercise during the budget process. Maintaining a broader scenario-management process throughout the year can enable more effective and agile business decisions.
6. Incorporate advanced analytics — Incorporating advanced analytics such as machine learning (ML) and artificial intelligence (AI) can automate certain tasks and enable more accurate estimates through uncovering trends and identifying outliers with greater precision than traditional methods. For example, ML models may be used to analyze expense data, spending patterns and trends to identify high-cost suppliers or expense categories, providing insight for where cost reductions may be achieved without compromising quality. A trained generative AI model also may be used to generate the demand forecast for a planned new product line by analyzing historical sales patterns, promotional events and market trends.
7. Ensure data availability and integrity — Data supporting critical assumptions and inputs into financial models should be readily available and clean. It’s imperative for organizations to establish data-quality, management and governance strategies that are flexible enough to adjust to evolving standards as new data is introduced and older data is better understood. Building a focused and solid data foundation will allow for effective and efficient analytics to support more accurate budget assumptions.
8. Optimize use of technology — Spreadsheets continue to be widely used by FP&A in budgeting and forecasting; however, planning tools may be used to streamline these processes, enhancing efficiencies and accuracy. In addition, the use of cloud-based solutions allows for more real-time access to financial data, which is especially valuable for companies with multiple locations and/or remote teams.
9.  Formalize agreed-on performance metrics — During the budget process and beyond, performance metrics provide a clear picture of whether the organization is on track. Performance metrics must be chosen carefully, ensuring alignment across the organization and ability to regularly monitor progress against these metrics throughout the year. Such performance metrics can be used as a basis for incentive planning to drive behaviors that may allow the organization to achieve strategic and financial goals.
10. Track ongoing performance and adjust — The journey does not end after the budget is finalized. Ongoing performance tracking relative to the budget allows for timely adjustments to be made in future forecasts, refining key assumptions and deploying contingency or action plans when certain circumstances arise. Routine checkpoints between FP&A and business partners to review performance, assess progress of strategic and financial goals, and collectively assess risks and opportunities can contribute to the overall achievement of strategic and financial plans.

Incorporating these best practices into the annual budget process can help elevate it beyond a routine financial exercise to a tool that may be leveraged to guide financial and strategic decisions, enabling an organization to be able to adapt to a continuously changing business landscape.