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GlobalFinance 360 FINANCIAL BUDGETING THAT MATTERS 8 TIPS FOR A BETTER BUDGET Author: Stephen G. Lynch .” To achieve Speak with virtually anyone involved with the annual budgeting process and they’ll tell you that it’s painful: time consuming, difficult, error prone, and based more on politicsmaximum value, than on valid economic assumptions. The worst part, however, is that the budget is viewed as obsolete almost as soon as it’s complete. Despite these challenges, mostmanagers will corporations are tied to the traditional budgeting process as they don’t believe they have anything better to replace it with.need to reinvent Fortunately there are companies who have scrapped the traditional notion of a budgettheir budgeting and have replaced it with something much more useful. They still have a budget, but their updated budget has been streamlined. No longer do they put themselves throughprocess to make it the long and difficult budgeting process; rather, they focus on creating a budget that is far less detailed but that communicates the key ideas of the planning process.more meaningful.In leading The Goals of Budgetingorganizations, the The annual budget and the budgeting process serve a number of goals. Among them are:financial budget Link operational plans from multiple departments. The budgeting process,represents the as opposed to the actual budget, fosters communication and enables the coordination of business unit and departmental activity across the organizationculmination of an to support the achievement of strategic plans.effective process Capital allocation. One of the key aspects of the budget is to decide where athat translates company will employ its resources. Strategic plans around new products and markets, research and development, production capacity and otherstrategic dimensions will feed directly into the budget.objectives and Performance monitoring. The control of capital and the early detection of deviations from establish plans have also been key elements of budgeting.operational plans Reports comparing the variance of actual results from budget are a standard component of management reporting packages.into financial Compensation rewards. Many executives have a portion of their pay linked toplans.” the attainment of budget goals. The targets established through the strategic planning process are incorporated into the budget and ultimately into the annual performance plan for these executives. The Problem with Traditional Budgeting Budgeting as a tool can be very useful but the traditional budget is a product of a th distant past. During most of the 20 century, manufacturing dominated the industrial landscape. These businesses were hierarchical and capital intensive. It was the job of managers to oversee the deployment and allocation of capital. To do so, they needed strict controls over capital allocations and information to understand how closely they were tracking to their financial objectives during the year. Couple this with a business Global Finance 360 | Copyright 2011 | All Rights Reserved 1
environment that was minimally impacted by globalization and it’s easy to see how aAbout Global Finance 360 detailed, static budget was sufficient to provide value to management.Global Finance 360 covers theworld of corporate finance and Unfortunately, while the world changed the annual planning cycle remained relativelyaccounting and how these static. Whereas in the past manufacturing facilities and production volumes helpedactivities are impacted by determine corporate value, companies today are far more likely to create value throughglobalization. Focus areas product innovation, mass customization and agile supply chains. Given the newinclude Finance Delivery realities, traditional budgeting suffers from the following issues:Strategy, Shared Services,Business Process Outsourcing, The traditional budget takes too long to prepare. It’s not uncommon for aProcess Improvement and budget to require 4 – 5 months and consume a substantial portion ofOrganizational Design. executives’ time.Global Finance 360 is run by The budget is too manual. Many companies prepare and consolidate theirSteve Lynch. Mr. Lynch is a annual budget in Excel. This increases the time necessary to develop thePrincipal in the Finance budget and exposes the budgeting process to human error as spreadsheetsTransformation practice of a are manually combined to reflect organizational roll-ups.global consulting company. Heis responsible for the marketing, The level of detail is too great. Many companies make the mistake ofsales and delivery of Finance building too much detail into the budget. This creates far more complexity thanTransformation services in North is necessary. Instead of facilitating the budget process, it actually becomes aAmerica and serves as a key hindrance to the creation and monitoring of the budget.liaison for his company’s globalFinance practice. He brings The number of iterations is too high. A typical budget can require 5 - 6more than 15 years of iterations before the numbers are accepted by senior management. Leadingexperience advising global companies focus on minimizing the number of iterations to reduce the time andcompanies on their service effort spent on budgeting.delivery strategies and hasserved over 60 clients in a Budgets are internally focused. Most of the numbers in the budget arevariety of industries including based on previous years’ data. All too rarely is a budget based on existing andconsumer products and anticipated economic factors that drive volume and cost. Few companiesindustrial manufacturing, evaluate their proposed revenue and cost structure based on similaraerospace & defense, companies in the industry. Finally, the budget measures internal metrics suchtransportation, technology, as revenue growth, but fails to take into account other levers of value such asentertainment and financial customer satisfaction.services. He has also served asa Controller in private industry Budgets lock in costs through the year. While the budget is thought of as aand as an auditor in public tool to control costs, all too often costs are locked into the budget for the year.accounting. Even if economic conditions vary widely from the assumptions upon which theMr. Lynch is an active content budget was built, the company’s cost structure resists downward pressure ascontributor on the topics of those costs were budgeted for the year.Finance Transformation andglobalization and has presented Politics permeates most budgets. The annual budgeting process hasat various forums including the become a high-stakes game of bluffing. Many managers “pad” their budgetsIQPC Shared Services & with extra costs so that they end up with something they envisioned after theirOutsourcing conference. He can budget requests have gone through multiple iterations.be found on the web atwww.globalfinance360.com. The budget is quickly obsolete. Given that the budgeting process can start four or more months before the end of the fiscal year, and coupled with aContact Information: dynamic business environment, it’s no surprise that many budgets are obsolete after the first month of the fiscal year.Steve LynchToll-free: +1.800.216.2512 Building a Better BudgetOffice: +1.719.481.25991042 W. Baptist Road Given the challenges in the budgeting process, leading companies have moved to aSuite 194 new budgeting paradigm that emphasizes speed and flexibility. Here are eight ideas toColorado Springs, CO 80921 incorporate into the budgeting process:email@example.com Global Finance 360 | Copyright 2011 | All Rights Reserved 2
About Global Finance 360Global Finance 360 covers theworld of corporate finance and Establish key linkages between the strategic plan, the Sales &accounting and how these Operations Plan and the financial budget. The numbers in the financialactivities are impacted by budget should be the culmination of a planning process that begins with theglobalization. Focus areas strategic plan and incorporates demand and supply plans from Operations.include Finance DeliveryStrategy, Shared Services, Scale down the budget. Reduce the number of line items budgets to focusBusiness Process Outsourcing, on the true drivers of revenue and cost. It isn’t necessary or desirable toProcess Improvement and create a highly detailed budget. Focus on key line items that are material andOrganizational Design. that are derived from supporting operational detail.Global Finance 360 is run by Automate the budget with a dedicated software solution. Reduce relianceSteve Lynch. Mr. Lynch is a on Excel spreadsheets and manual consolidations. Invest in a dedicatedPrincipal in the Finance software solution that provides a web-based interface for users, workflow,Transformation practice of a security and that automatically rolls up budgets at each level of theglobal consulting company. He organization. These software packages also facilitate the reporting of actual,is responsible for the marketing, budget and forecast data.sales and delivery of FinanceTransformation services in North Employ zero-base budgeting. Don’t use last year’s numbers as a base forAmerica and serves as a key the upcoming year. It’s too easy for managers to simply resubmit theirliaison for his company’s global numbers without going through the exercise of determining costs based onFinance practice. He brings estimated activity volume.more than 15 years ofexperience advising global Document budget assumptions (e.g. growth rates, estimated activitycompanies on their service volume). Just as footnotes are an integral part of financial statements, thedelivery strategies and has assumptions made to develop a budget are also critical. Assumptions must beserved over 60 clients in a realistic or the budget will lose credibility.variety of industries includingconsumer products and Foster dialogue across functions. The process of budgeting, if doneindustrial manufacturing, correctly, can add as much or more value as the budget itself. Whenaerospace & defense, departments work together on an integrated budget, they gain a bettertransportation, technology, understanding of the challenges facing the overall organization. Strongentertainment and financial communication leads to more useful budgets.services. He has also served asa Controller in private industry Move compensation goals from a static budget to a series of balancedand as an auditor in public KPIs. Yes, some will still be financial in nature and a streamlined budget canaccounting. capture those. Revenue, Gross Margin, EBIDTA, Return on Invested CapitalMr. Lynch is an active content can all be measured against pre-established targets. But managers shouldcontributor on the topics of also be evaluated on non-financial factors such as product innovation, time-to-Finance Transformation and market, employee satisfaction, customer retention and customer satisfactionglobalization and has presented ratings.at various forums including theIQPC Shared Services & Allocate capital based on a dynamic forecast rather than on a staticOutsourcing conference. He can budget. In most industries business events occur too quickly to depend on abe found on the web at static budget for capital allocation. Leading companies use their forecast towww.globalfinance360.com. identify emerging market opportunities and enable them to respond more quickly to those opportunities.Contact Information:Steve Lynch ConclusionToll-free: +1.800.216.2512 Budgeting still matters, but to obtain the greatest value from the budgeting process,Office: +1.719.481.2599 companies need to adjust to the present realities. By following tips outlined above, companies will produce more meaningful budgets with less effort and cost, freeing up1042 W. Baptist Road time and management attention to focus on creating value in their businesses.Suite 194Colorado Springs, CO firstname.lastname@example.org Global Finance 360 | Copyright 2011 | All Rights Reserved 3