Crafting an accurate and robust annual budget is a vital aspect of business planning that all finance teams must prioritize. This necessary process allows organizations to see their current financial position, identify their business drivers, and then build a comprehensive annual budget designed to support company goals. While the annual budgeting process may be an essential project for all finance teams, it is also a process that is known to be complex, time-consuming, and, at times, inefficient.
So how can finance teams take a more agile approach to their annual business planning? Our experts at Abacum are here to help. If you are looking to improve your team’s budgeting process, surpass common roadblocks, and have fewer headaches this budget season, read our top tips below.
The importance of annual budgeting
Budgeting serves as a financial blueprint for companies to follow for the coming fiscal year. It serves as a guide to inform all departments of the financial resources they have for the year ahead, including what to spend on and how much per investment.
This guiding financial roadmap should include a macro view of the organization and each department, as well as a micro scrutiny of each aspect of the budget, including itemized expenditures. With strong budget management as a financial foundation, organizations can keep expenses on track and focus better on reaching their business goals.
Top-down or bottom-up: Which is right for your company?
Finance departments typically execute one of two kinds of budget: top-down or bottom-up. A top-down budget means that the senior management defines the budget for each department for the coming year. They may consult the individual departments but, ultimately, they decide and impose the budget for each team to manage. This method is usually faster and less complex compared to the bottom-up alternative, as each departmental budget is formulated as part of one overall organizational budget and by the same people at the top of the organization. However, it may result in departments not being able to pursue everything that they would like to in order to meet their goals due to financial restrictions. Moreover, employees may feel frustrated at having little or no say in their department’s budget creation.
A bottom-up approach means the employees of each department get to decide their own budget and submit it to senior management for approval. This method entrusts the budgeting responsibility to the people who understand the day-to-day workings of their department and function better than anyone else: the employees. It can produce more precise insights into budgetary requirements and boost employee morale and ownership. However, it results in many different budgets at once, one for each department. Moreover, each department may not align with others, so there may be a disconnect in terms of departmental budget ambition and how viable certain corporate expenditure is without taking into account how it impacts other departments. For instance, a Marketing department may wish to ramp up lead generation by purchasing a content syndication platform. But, the sales department may not have the headcount capacity to meet a surge in leads at this moment in time. In this case, the Marketing team must meet with the Sales team to discuss how an influx of leads may impact their function.
What Are the Most Common Roadblocks of Annual Planning?
Finance teams tend to run into similar problems, which can be hindrances to effective, efficient budget planning. The most common of these issues are as follows:
Cross-functional collaboration problems
To efficiently gather data, finance teams need to be able to collaborate with other departments in an optimal way. However, it can be commonplace for different departments to each use their own preferred systems and ways of working. With different methods of gathering, storing, and retrieving data, the ability to collaborate is made more difficult.
Since the Finance team often has to rely on email, Slack, and other communication outlets to collaborate with team heads, there is often a misalignment. Without having a uniform process for communication in place, Finance has to chase down management just to be able to gather required data. Not only can this process be tedious and time-consuming, but it is also inefficient, which further delays the budgeting process while also adding more strain to the Finance function.
Difficulties with data collection
Data collection is one of the most important aspects of any annual budget. Without a clear picture of what is going on within the organization, it becomes much harder to make informed decisions about where to allocate funds. Finance teams often struggle to collect enough information from across the organization to create a complete picture of the business. As such, many companies end up spending money on projects that don’t deliver value or miss out on opportunities because they lack the right information.
Gathering data is often tedious and time-consuming. This is especially the case when aiming to gather data from different sources across the organization. By switching to a collaborative financial planning software, organizations will be able to align on a single source of truth.
Prone to human error
Reliance on manual data entry always comes with the risk of human error. This risk only multiplies the more manual processes and systems in use. This is not only the case for the finance team but for all departments that manage data. This can be problematic as the finance team depends on data from other functions to conduct their annual budgeting.
The budget process requires numerous inputs from all departments. In order to create an accurate financial plan and meet strategic goals, Finance teams must be able to automate the data gathering process so they can focus on more value-added tasks. By eliminating the risk of human error through automation, finance teams can streamline and improve their overall annual budgeting planning process.
Lack of data accuracy
A company’s annual budget can only be as strong as the integrity of the data that informs its creation. However, it is all too common for poor-quality data to enter the process. This can happen as a result of numerous developments, including data entry human error and a lack of data conversion precision. This is why data accuracy in financial planning should be considered a top priority.
Poor data quality tends to arise for similar reasons, company to company. These include a reliance on manual processes, which increases the likelihood of human error. For instance, spreadsheet data entry can be inputted incorrectly. Another reason is the continued use of handwritten paper documentation, which makes data management, document retrieval, and data extraction more difficult and time-consuming. Substandard data governance can also result in different approaches to data management, including varying approaches to formatting and style.
Lack of unified data
Data is not always stored in a unified way. Reconciliation of data held in different formats and in separate silos can be an arduous, labor-intensive process. Furthermore, it prevents an organization from establishing and maintaining a single source of truth. This makes budgeting season much more complex than it has to be.
Identifying various data sources takes time. Then there is the considerable task of obtaining it - which can mean contacting specific departmental employees, as well as following up. If certain data gatekeepers are unresponsive, as a result of being too busy, on vacation, or another reason, it can make the process of data gathering that much more frustrating.
Additionally, if data is stored in different format types, it takes yet more time to reconcile these into one master format. These are labor-intensive tasks, which requires time that finance teams, as well as their collaborators from other departments, could put to much better use contributing to a budget design that is as strong as it can be.
The Future of Annual Budgeting
Companies are increasingly integrating financial planning and analysis (FP&A) software at the core of their budget cycle management. With strong FP&A software, financial departments can revamp the budgeting process. As a result, they can eliminate manual processes, improve data accuracy, and drive cross-functional collaboration. Moreover, FP&A software can transform the process of data gathering from across the organization and position finance teams to derive deep insights for strategic decision-making.
Forward-thinking finance teams are taking a two-way approach to budget cycle management. This consists of using a standard budgeting procedure, with the help of modern systems like FP&A software. Concurrently, they are also executing a rolling forecast system to optimize the financial health of the wider organization throughout the course of the year. Rolling forecasts take into account historical data, allowing organizations to better predict future performance.
Accelerating Annual Budgeting Performance with FP&A Software
As companies continue to embrace digital transformation, they will need to make sure that their budgets reflect this change. The adoption of new technologies such as FP&A software will allow them to streamline the budgeting process and create a stronger foundation for business growth.
To eliminate common bottleneck problems associated with budgeting in Excel, modern finance teams are increasingly upgrading to an FP&A software solution. As a result, they are able to automate the data consolidation process and free up massive amounts of time to focus on more value-added initiatives. By transitioning to an FP&A software-led approach, finance teams are able to leave the inefficiencies of spreadsheets in the past. In their place, FP&A software automates many time-intensive processes, minimizes human error, and supports high-performance budget cycle management.