For many businesses, the budgeting and planning process, although often laborious and time consuming is one of the most critical activities of the year. Putting in place a comprehensive budgeting strategy now means more than just implementing a plan to control your cash flow.
Here are five strategies for maximising the effectiveness of the budgeting process.
An effective budgeting process adds value by helping businesses determine how much money they have to fund strategic operations, encourages spend effectiveness and challenges processes and procedures across the entire business.
Failing to implement an effective budgeting process has the potential to cause a catastrophic knock-on effect for each and every department across the business. Both in terms of limiting each function’s ability to achieve their objectives but also in terms of ineffective allocation of limited corporate resources.
So why are businesses not already getting the most from the budgeting process?
There is one simple answer here. Habit. Companies go through the budgeting process annually, and as such, become very accustomed to doing so. Processes become ritualistic, and status quos are perpetuated. There is often no appetite to fix what isn’t broken here and no perceived advantages for doing so.
The advantages of an effective budget process go far beyond numbers. While savings opportunities will of course be highlighted; a good budgeting strategy can also promote efficiencies, encourage innovation, challenge mindsets and create a cohesive vision of success.
So how can these opportunities be harnessed? I’ve suggested five key considerations below to help business leaders maximise the effectiveness of their budgeting process:
- Review your current strategy: How do you currently approach the budgeting process? Do you follow a particular model and do you understand the advantages and limitations of this model? Have you considered any alternatives? One increasingly popular budgeting model is that of zero-based budgeting. This transformational approach has been credited with revolutionising not just the budgeting, but the cost management structures of companies such as Kraft and Heinz. Bain and Co. suggest that zero-based budgeting “offers a practical way for companies to radically redesign their cost structures and cut as much as 25% of spending on overhead and support functions, whilst boosting efficiency and competitiveness.” However, there are a number of other alternatives. Review each one and decide which model (if any) are the most applicable to your business, in the context of what you have in place today.
- Include your procurement function from the start of the budgeting process: Procurement are in a unique position to capture and share new or critical insights from the supply market, in addition to the insights gleaned from working alongside each division of your business. Procurement’s holistic view of costs means it should be able to spot efficiencies and synergies within your business, minimising duplication or redundant spending. Bringing procurement into the budgeting conversation in the very early stages gives budget setters access to this critical insight enabling them to build effective and efficient annual plans. Further, procurement can add value to the budgeting and planning process by advising on decisions and strategies for the year ahead – decisions such as make vs buy – by analysing movements in the supply market and feeding this information back.
- Take a long-term view: Take a two to three year view of the budgeting process and set critical annual milestones. The longer term view means that all the good work done this year, isn’t lost next year, or that big projects that will deliver benefits beyond this year’s budgeting process can still be actioned. Similarly, and following the last point, budgeters would benefit from engaging procurement in these long-term conversations – given their close working relationship with each division of the company. Procurement are well-placed to advise on the long-term strategic needs of the company, and influence the budget to achieve this; advising on the best way for the company to get value for money in the long-term as well as the short-term. For example, should your IT department take the hit and invest in an expensive piece of technology this year as prices show signs of increasing? Or should they hold off for a few years and wait for a forthcoming innovation in the wider supply market? What implications will these decisions have on the operations of your business? Decisions such as this are critical for budget holders to consider.
- Agree the governance behind the process in advance: Who is responsible for each aspect of the budgeting process, is it a sole responsibility or a cross-functional responsibility? Agree a governance structure around managing the challenges and targets prior to beginning the budgeting process. Employ the RACI governance model and map the involved functions to this. For any divisional budget targets, ensure that each division is responsible, but that procurement is accountable for achieving these targets. This encourages divisional leaders to work collaboratively and effectively with procurement to maximise value for money, reduce wastage and create total spend effectiveness.
- Encourage the right mind-set: Make sure all those involved in the budgeting process are coming at it from the same perspective. Ensure there is a clear message around what you are looking to achieve. Again, look to your procurement team here to help influence internal stakeholders and cultivate an environment that encourages everyone around the budgeting table to look for opportunities to make costs more effective, rather than simply looking for areas to squeeze out savings. Soothe any resistance by reaffirming the end goal and encourage ideas around new processes, procedures, objectives and strategies to achieve this.
In short, the implementation of a strategic and effective budgeting process is critical to get right. It sets the tone for the business for the following year, challenges mind-sets, and encourages collaboration. Simply repeating the same tired process year after year is not only laborious, but is also an ineffective approach. It stifles innovation, and creates a stagnant culture that is not conducive to spend effectiveness.
By Guy Strafford, EVP, Chief Client Officer at procurement services provider, Proxima