"The business-as-usual budgeting process, with its traditional inputs and standard approaches, is no longer fit for the task.” That’s the latest CFO advice from renowned consulting firm McKinsey.
“For instance, 43 percent of the 127 CFO respondents we recently surveyed cite the need to streamline their overall budgeting processes to react more quickly and efficiently,” they continue. “Meanwhile, 65 percent anticipate more use of rolling forecasts in 2021 and beyond."
Highlighting the need for strategic budgeting, the overall consensus across the industry is that resource allocation needs to be bottom-up, and should be based on real-time data.
But we’ll get into the details shortly.
Whether your company is in a period of aggressive growth or still recovering from the pandemic, current budgeting methods simply don’t meet business needs. This introduction to strategic budgets offers an alternative way to better forecast, plan and allocate your funding.
What is strategic budgeting?
Strategic budgeting allows flexible forecasting for complex spending and revenue goals. Its purpose is to shift the focus from the big picture to detailed data. Businesses use budgeting tools to better allocate funds, and achieve specific long term goals.
The aim is to improve business spend management and follow a long term plan - at least the following 12 months. In theory, this helps to develop efficiency across the entire supply chain.
Categories of budget goals may include:
- Risk management
- Productivity and capability
- Research and development
- Growth and scaling
Once the overall goals are decided, strategic budgeting managers will then zoom into each area and create more detailed spending plans. The basis of these decisions relies on being informed by the data on hand.
For example, allocations may relate to expenses in research and development, hiring and salaries, or industry competition.
Top-down vs bottom-up budgeting
Realistically, companies will choose to budget however they want to meet their financial goals. But, there are some common approaches in the way the operating budget is typically managed.
Top down budgeting is the most widely used form of fiscal management. It gives the ‘power’ to the senior leadership team, who decide on the funding allocated to each department.
Typically, senior leaders will hold an annual budget meeting and allot monetary resources according to company-wide goals. Then, the proposed budgets will be sent to each department, where managers will plan and illustrate how the money will be spent to meet the revenue goals.
The top-down budgeting process can be useful, since it’s fast and creates organizational transparency. But, it mostly relies on using figures from the previous year which can be a constraint for some departments. Plus, top-down budgeting lacks a ‘buy-in’ from the employee level, whereby individuals are not part of the decision-making process and therefore unbothered in it’s success.
By contrast, bottom-up budgeting originates with the departments themselves. In this approach, teams identify the costs associated with their individual revenue or business objectives and then send this information through to senior leadership. From there, requests can be approved, denied or revised.
Bottom-up budgeting has the advantage over top-down style for most modern businesses. Although there may be a lack of cohesion, the bottom-up budgeting process is usually far more accurate since it comes directly from each individual department.
A bottom-up budget focuses on the real-time data, rather than projections. Moreover, there is no ‘use it or lose it’ culture- which means that even the lowest level employees feel empowered to meet financial objectives.
Keys to more a strategic budgeting process
There are several ways that your team can exercise more accuracy and control over the budget. Improving your process to become more strategic is likely to aid its suitability and impact the entire performance of your business.
Use bottom-up budgeting
The number one priority for teams is to use up-to-date data to inform your decisions instead of setting goals and creating a financial plan to fit. This bottom-up approach to budgeting is the best way to respond accurately to real-time updates.
Moreover, letting departments sculpt their own budgets has been proven to improve performance indicators across the board. Remember that the finance department can always be available to help guide the budgeting process.
Keep a slush fund
Evidence-based budgeting decisions are especially important while resources are scarce, according to the US Office of Budgets. But more than that, being prepared for economic downturns will help protect your business.
A slush fund is a pot of money put aside in reserve for emergencies. Covid proved that anything can happen- a slush fund will protect your business against expenses that occur outside of the initial budget scope.
Setting aside time for review is an important part of a strategic plan, especially in periods of growth. Regular budget reviews enable companies to manage cash flow effectively, and experiment with spending in new areas.
What’s the best way to review your budget? It doesn’t have to be a complicated analysis.
Simply compare your income with actual spending and determine the reasons for a shortfall or overspend. Then, implement measures to allow your teams to continue their work efficiently while ensuring that your budget is more accurate moving forward. In this way, budgeting will be based on the strategic priorities of the business.
Identify smart ways to track the budget as you go, for continuous analysis and improvement. Smart tracking refers to automating and digitising your budget follow-ups. In 2020, 40% of companies report making use of digital automation & technology within budgeting and forecasting.
Build the right budget strategy for your business
The ‘set it and forget it’ budget process is inefficient and unproductive. Smart tracking allows your team to stay on track with the most up-to-date data, and helps automate your budgeting system. In this way, you can easily track spending, income and make changes to the budget fluidly.
Fortunately, creating a more strategic budget doesn’t have to be too involved or difficult.
Spendesk lets you set budgets for each individual team and track every payment against the planned expenses. Not only does this enable your managers more visibility, but it empowers employees at all levels with more control over your budgets. Working with Spendesk means you’re strategically managing budgets automatically, by default.