Creating an annual budget is like playing a game of chess. Each decision made must be methodical, calculative, and intentional.
In today’s landscape of uncertainty, proper budgeting and forecasting have never been more critical for an organization. Unfortunately, as we’ve seen with this global pandemic, the only thing companies can be certain about is that uncertainty is a constant.
In order to embrace these ever-changing conditions, companies have to be aggressive in their strategic planning and adjust for what-if scenarios, changes in demand, or even a global crisis. So, how can organizations think outside the box and prepare for any situation? By building a better financial budget.
CFOs and finance leaders everywhere have to evolve the way they do business if they want to improve budget execution. By focusing on a solid forecasting strategy and using scalable FP&A software, finance professionals will be able to quickly and efficiently adapt their future budgets as needed.
Modernizing traditional budgeting
The COVID-19 era has surfaced countless lessons for organizations across the globe. Gone are the days when finance teams created a simple forecast and expected only slight variability throughout a fiscal year. Now that companies have personally witnessed just how detrimental a global crisis can be for an organization, they have started taking a more hands-on approach to their financial planning and forecasting initiatives.
And the biggest lesson of 2021? Traditional budgeting approaches and standard inputs are just not going to fly anymore. Instead, financial management is getting a shiny, new upgrade, and it’s up to each individual finance team to adjust accordingly.
In a study conducted by McKinsey & Company, “43% of the 127 CFO respondents surveyed cited the need to streamline their overall budgeting processes to react more quickly and efficiently. Meanwhile, 65 percent anticipate using more rolling forecasts in 2021 and beyond.” This shows the shift in mindset finance professionals are experiencing everywhere after experiencing setbacks from COVID.
Experts are finding that all industries (whether that be grocery stores, Fintech companies, or start-ups) have been affected by this pandemic. It is safe to say that all industries need to adapt faster, gain valuable insights, and plan for whatever might come their way.
There is no straightforward answer when discussing how to create the "perfect" financial budget. Instead, organizations have to take a custom approach that accounts for their industry, location, customers, and overall financial goals. By being more strategic in their financial budgeting, companies will stay agile in life’s most uncertain times.
So, what can CFOs and finance professionals do to improve their financial budgeting process? This next section will cover our top tips on how to build a better budget.
How to create a more agile budget in 2022
Does your chief financial officer have all the financial information they need to create an annual comprehensive financial report? To develop a robust annual budget, the CFO must have a clear vision of the company's overall financial statements and metrics. Top management can then adjust the strategic plan as needed.
Before you start building a budget, take a moment to reflect on the past few years. How did your team handle the COVID crisis? Were you able to adapt your forecasts quickly, or did you fall behind and feel lost during the most trying months? By reflecting on the past, your team can see where they need to adapt in the future.
Taking into account assumptions & stress tests
How much of your budget process involved stress tests and what-if scenarios? If your finance team tends to glide over this step when creating a financial report, it’s time to reconsider your strategy. Think back to the past two years and analyze how company performance and growth were affected. Was your finance team prepared? Were you able to maintain cash flow management, or did it suffer? More often than not, FP&A teams were completely blindsided by the rollercoaster of uncertainty COVID brought forth.
By taking a more aggressive financial planning and analysis approach, senior management can recalibrate their finance forecasts as needed. Investing in the right technology and playing an active role in strategic planning will allow finance teams to provide more value-driven data for financial budgets and forecasts.
To drive this point home, ensure that senior leadership across all departments is conducting stress tests before solidifying a financial report. By aligning all teams and improving communication across departments, the entire organization will be able to pivot together as necessary.
Consider zero-based budgeting
According to Investopedia, zero-based budgeting is a method in which all expenses are justified for each period. This method ensures that every function that contributes to a company is analyzed for its needs and costs. Budgets can then be built on this foundation and include what’s necessary for that next period. Generally speaking, zero-based budgets tend to be more detailed in nature. As a result, professionals who take this approach can lower costs and adjust their forecasts as needed depending on past performance and current conditions.
For companies looking to stay on their toes and adjust their budgets, a zero-based budgeting approach may be the perfect way to do so. CFOs and finance teams will be forced to work closely together to analyze current spending and reallocate money as necessary. All in all, if teams want to adapt quickly, they must have a deep understanding of their financial landscape every month.
Create a financial safety net
Did your team have a contingency plan to adapt to 2021’s unexpected curveballs? Without the right preparation, it can be impossible for companies to stay afloat during their most challenging months. By setting aside financial reserves, companies can have peace of mind knowing they have security should a roadblock arise.
During this period of uncertainty, building an agile budget will allow the finance team to shift resources as needed. What variable costs might your company expect should a new pandemic strike? Can you reduce your fixed costs now that teams are working remotely? If your team is just getting started on a new project, consider the additional resources that will be needed. By having available resources, your team will have the freedom to either postpone a project or push forward no matter the current situation. This method improves transparency across the entire organization and aligns senior management on current and future resource allocation.
Streamline your financial planning & analysis process
Too many finance teams are stuck in the past and continue to do manual data processes by hand. If you want to have accurate budgets and save more time for value-driven analysis, your team must use scalable FP&A software. Whether you are looking for an Excel automation tool or another type of financial automation software, finding the right FP&A solution will allow your team to stay agile during the most uncertain times. By knowing which FP&A software features to look for and staying up-to-date on all the latest FP&A trends, teams will be able to put their best foot forward when creating their budgets and forecasts.
Looking to upgrade your financial planning process? Check out our 2022 FP&A Software Buyer’s Guide now!
Leverage Abacum to alleviate stress on finance teams
If your team wants to take a more strategic approach to their FP&A strategy, Abacum is the perfect solution. Our FP&A software isn’t just your average forecasting tool; it is an entire solution designed to turn finance teams from number crunchers to decision-makers. By integrating with a wide variety of data systems and offering key collaboration features, Abacum serves as the missing piece that revolutionizes the entire budget process from A to Z.
Ready to build better financial budgets with Abacum? We’ve got you covered. Request a demo to learn how our platform can modernize your financial planning process.