In a recent webinar entitled "The CFO Playbook on Budgeting: How to Keep Budgets Effective," Roger Howell, the Principal of PwC, and Brian Blanton, the Director of the Hackett Group, discussed the ways in which CFO's can manage budgets and strive to keep budget plans accurate and effective.
In a poll, only 57.5 percent of respondents claimed they were somewhat satisfied or very satisfied with their current budgeting process, while the remainder desired an improvement in their budgeting approach.
What Factors Impact Budgeting?
CFO's are impacted by a variety of outside
factors that put added pressures on budgeting.
With so many CFO's reporting dissatisfaction with their budgeting process, it's important to recognize the unique demands of today's marketplace that are leading to increased budgeting challenges. Some of the main factors that complicate budgeting and forecasting include:
- Increased expectations: The lack of integration between operations and Finance coupled with the demanding deadlines for budgeting cycles has made it increasingly difficult to effectively generate aligned budgets.
- Uncertainty: For fast-growing and dynamic businesses, accurate financial forecasting is challenging, due to the countless variables that create future uncertainties.
- Competition: As competition grows fiercer, companies have more pressure to lower prices, which creates budgeting constraints, while making it difficult to establish consistency in budgeting.
- Innovation: The constant product innovation makes it difficult for financial planners to keep up with their budget, and they need an agile solution that can rapidly adapt to fluctuating business trends.
Adapting Budgets for Evolving Businesses
In order for businesses to combat the uncertainties that disrupt planning, they need to create adaptable budget plans that will accommodate business fluctuations. According to Blanton, adaptable budgets are critical to ensuring resources are allocated appropriately, profit opportunities are maximized, and overall business risk is minimized. With adaptable budgets, forecasts will be more accurate and budgets will be more aligned, which will inevitably result in reduced business risk.
The CFO's Role in Budget Transformation
When asked what the CFO's role in budget transformation should be, Blanton said that, "CFO's in today's world are taking on more and more responsibility to not just be number crunchers. They're really getting involved in helping to drive business decisions and make sure that profits and losses are being maximized and minimized." The role of CFOs is more involved than ever before, and they are taking a strategic approach to budgeting that no longer focuses solely on numbers but rather the overall vision that those numbers encompass.
Tackling Budget Transformations
When tackling budget transformations, organizations need to incorporate the following concepts to establish a new budgeting approach that works for their business.
Organizations should clearly establish all desired outcomes, while outlining what they hope to achieve from their budget transformation. Establish a vision and work toward that vision incrementally, rather than tackling the entire implementation all at once. According to Howell, when approaching budget transformations, CFO's need to primarily focus on driving integration and streamlining the details of budgeting to understand the core factors that are fueling the business.
What Challenges Do CFO's Face?
CFO's face a number of challenges when approaching budget transformation. One of the main challenges is the fear of change, as many people have grown accustomed to utilizing their current budget systems and are hesitant to adopt new methods. Additionally, the status quo results in competing agendas which can make it difficult for CFO's to introduce new software and technology.
In the webinar, a poll was conducted regarding the number of organizations that prepare rolling forecasts. Nearly 48 percent of respondents said they don't prepare rolling forecasts, which unfortunately results in budgeting constraints and compromises the accuracy of forecasts. To transform the approach to budgeting, organizations need to rely on new and better technologies that can streamline the budgeting cycle, while enhancing accuracy. With advanced modeling techniques and integrated EPM software, businesses can create rolling forecasts that are accurate, agile, and can rapidly adapt to fluctuating business trends.
Zero-based budgeting can be another effective tactic when tackling certain budgeting tasks. Although, its applications are limited, and it can't be practically applied to the majority of budgeting tasks. However, zero-based budgeting can be effective when approaching acquisitions, particularly when organizations are seeking to alter operational aspects of the company. They are also effective for transforming the cost structure of a company and can provide the company with a new perspective that other budgeting models failed to capture.
Adapting Budgets Efficiently
For dynamic businesses, the ability to rapidly adapt budgets is critical. Blanton says businesses need to get away from manual forecasting and budgeting and focus more on driver-based capabilities. This will enable faster budget adjustments, rather than going through the entire budgeting and forecasting process every time product lines or pricing structures change.
The Budgeting Technology of Today
Businesses rely on two main types of budgeting technology: cloud technology and on-premises technology. The cloud provides a number of advantages to the budgeting process that can simplify budgeting for businesses. By providing a more secure platform, reducing the investment and management costs of data storage, eliminating the need for software installation, and providing global accessibility, organizations can enhance budgeting, while reducing their overhead costs. Conversely, on-premises budget technology requires lengthy software installations and implementations, as well as costly and time-consuming updates, while complicating data storage and disaster recovery.
With the cloud, business can experience increased accessibility and collaboration in budgeting.
Budgeting is becoming an increasingly challenging endeavor as increased market, industry, and operational demands further constrain the budgeting process. Businesses need to assess their approach to budgeting and devise ways to simplify the process, enhance efficiency, and improve accuracy and agility.
With EPM software, businesses can utilize advanced modeling and agile forecasting that will continually adapt to their changing industry. Additionally, by moving to a cloud-based platform, businesses can access the security, cost-savings, scalability, and increased accessibility that will further enhance budget planning.
To learn more, check out the replay of this webinar.