If you've already read Part 1 of this article, surely your organization is now in the midst of a lively rendition of kumbaya in eager anticipation of busting out a bulletproof budget in record time, just as soon as you're finished reading this article. In related news, I am well aware that portions of Part 1 might have read like a pipe dream to some, but I would like to reiterate that it can, in fact, work in the real world. It's not easy, but I've seen it. I've lived it. I've even driven it myself a few times. It can be done, but the surest way to never experience it is to chalk it up as folklore and carry on doing things the same way you always have. If that's you, best of luck on your future endeavors. If not, good. Let's get to work.
Where do you start?
Often what starts as enthusiasm around "righting the wrongs" from the prior year budget quickly turns into an intense wave of paralysis due to feeling overwhelmed at the task in front of you. All of those calls for tearing it all down and starting from scratch start to make you scratch your head and think to yourself "well, the last budget wasn't THAT bad, was it?" Maybe it was, maybe it was not, but that's not the point. The point is you need to get out of the weeds in the current model and take care of a few things at the 30,000 foot level before even thinking about jumping back into the deep end with your stale old model. So here's where you start:
1) Establish the team
Having a firm grasp around the doers and consumers of the budget is really thing number one. Identifying the key stakeholders in the process and clarifying who owns what will be critical in promoting a sense of purpose and perspective for all involved. The likeliest short list of stakeholders will include the board of directors, the executive team, and other internal team members. Ultimately the executive team will be the owners of the budget as they'll likely be responsible for presenting to the board (consumers) for approval, but the owners of the work (the doers) are going to likely include an executive project sponsor, a budget model owner, and a few key contributors representing different departments.
To provide an example, in many organizations the CFO will be the executive project sponsor driving the budget process forward while a mid/senior member of the finance organization will own the model. This owner of the model will serve as a sort of central hub responsible for collaborating with department heads and compiling, organizing, and reporting the results along the iterative process towards an approved budget. I should emphasize the inherently iterative nature of the process because as assumptions are compiled and rolled up for distribution, often the way things come together the first few times leaves a lot of questions and loose ends not immediately apparent when the process began. All of this can be addressed, however, as you build out your timeline and milestones.
2) Set the timeline
Now that the team is set and ownership has been clarified it would be smart to establish a timeline. Like any good project, you should be working toward a clear deliverable (a budget) due by a specific point in time (due date). Understanding this due date should make setting the timeline pretty straight forward by breaking down the milestones required and estimating the duration to complete each, ideally with some buffer included.
An example here might look something like:
10/1 - Kickoff meeting with internal stakeholders10/3 - Baseline model produced and submitted to stakeholders for review10/5 - Department head meetings with finance to gather input requirements10/12 - First round of input requirements due back to finance for model implementation10/17 - First round budget with input layers produced and submitted to stakeholders for review10/19-10/31 - Iterate, iterate, iterate11/2 - Preliminary budget submitted to executive team for review11/5-11/23 - Iterate, iterate, iterate11/30 - Budget cleared for presentation build12/14 - Budget presented to board for approval
Here you're looking at a two and a half month process from kickoff to approval, which really isn't unrealistic and actually might be considered fast for some organizations. Any of these steps can be expanded or contracted to meet the needs of your organization. The important point here is that each step is considered and given due consideration to ensure nothing is overlooked and everyone has time to do their part. If that's done, now it's time to get organized.
3) Get organized
Getting organized isn't necessarily what it sounds like. This is not about making sure everyone follows best practices in their folder file structures. Rather, this is about organizing the key players identified in step one around the timeline established in step two and ensuring everyone is on the same page. This is also where the early target setting around revenue and margins should gain alignment and strategic initiatives should be agreed to for purposes of the first round of modeling.
You don't want to march into the budgeting process with several "ideas" on strategy, but no direction on where to start. If you do, you'll end up with messy scenarios overlapping in multiple iterations of a model with unclear targets leading to significant churn and you'll end up anywhere but organized. It is okay to still have scenarios, levers, whatever you want to call them in your back pocket, but you need to start with firm direction out the gates to build the framework first. If that's done, it's time to roll up your sleeves and get to work.
4) Get to work
One of the most common mistakes I've encountered in organizations is that they skip straight to this step and wonder why budgeting is so hard. Similar to my sentiment reflected in Part 1 of this article, the reason for this is often a lack of leadership and generally indicative of an organization where departments operate in silos rather than collaboratively. This is so textbook it's a wonder that it happens so frequently, then again it wouldn't be so "textbook" if it wasn't such a prevalent issue - did I just create a mental circular reference?
Getting to work should actually be the easy part if you took the time to organize a team around key deliverables and deadlines. What this could actually look like might be something as simple as:
Build a baseline budget model based on prior year trendsCollaborate with department heads to layer over initiatives using assumptions/driversFine tune assumptions/drivers to dial in toward established targetsIterate until buy-in achieved
Clearly easier said than done, but this is effectively what should happen if you've followed these steps to this point. What makes this process so allegedly simple is that if you have the right people all aligned on the task you are able to focus your collective energy on achieving a known goal together. This cuts out the primary source of pain in a poorly run budget process which is generally centered around confusion on ownership and unclear and/or mis-aligned goals.
5) Track results
You thought you were done? The fun has only just begun my friend! Now that you have produced a winning budget, it's time to memorialize it for all to see and integrate it into your organization's standard month-end reporting. What this will do is allow for (hopefully) detailed variance reporting as the year progresses demonstrating how actual results compare with what was planned.
If you followed each step you should have very engaged department heads who know what was budgeted, why, and how. This is important now as you work to develop your narratives around performance to budget because you won't have departments pointing fingers and skirting ownership, rather they should be able to provide the insights needed to tell the real story around what's happening vs what was expected. You can skip the empty elevator analysis and provide real insights into the business performance because the people who helped develop the budget now have a vested interest in seeing how it stacks up in the real world. The result is compound collaboration, the opportunity to fine-tune assumptions and drivers, and come next budget season an increasingly solid foundation to build upon.
Leadership still leads the way
I said it before and I'll say it again, and again, and again: leadership is the key to running a successful budget process. If leadership is not aligned, your organization has silos, and the budget is viewed as something finance just pumps out every year this approach probably reads like pure fantasy. The thing is, it is not fantasy, it can and does work in organizations all over, and leadership is the secret to making it happen. If you've read this far I sincerely hope you found these tips helpful and I wish you and your organization a very successful budget season.
Does your organization need help working through the budgeting process? VBCG & Co can help!