After COVID -19, increased uncertainty like inflation, attrition, supply chain disturbances etc. has become the new normal which is forcing every business to think resilience & sustainability like never before in these extremely turbulent times.
Every corporate would have set the Budgets for FY 2022-23 and measure the actual performance against the budgeted numbers of completed period. There are many advantages of budgeting process like controlling profit margins, facilitate the formulation of strategies for fund raising by outlining the available funding in advance, execute & update priorities & strategies in timely manner.
However, there is a common challenge across all businesses that “How to get the Best out of Budgeting in current uncertain time”.
o Is budgeting exercise relevant in this uncertain time?
Yes. But the entire budgeting exercise has to be revamped with strategic purpose in mind as a routine approach will not serve the purpose in this uncertain time where forecasting is so challenging.
o Why revamped budgeting exercise is necessity in this uncertain time?
Can take transformative strategic decisions in line with company’s goals
Afresh understandings can unlock significant values across all functions & stakeholders
Agility & speed in decisions on resource allocation
So let us take a fresh look at the regular budgeting exercise & understand how to revamp it for the current year & coming time in view of the uncertainty & impacts on businesses.
Regular Budgeting Process
Additional Twist Needed
Budget Process – Annual
Budget process begins with alignment to company’s vision & goals. For e.g. if the company has set a vision of achieving geographic sales presence in each state of India with mission to achieve turnover of INR 10,000 crores by end of 2025, it shall be well integrated in the budget process of FY 2022-23 & following years. Similarly, plans (set of activities & strategies) are links between vision framework & budget. For e.g. company plans to extend geographical sales presence through dealer distribution model which shall be considered in the budgeting process of relevant functions.
Brain storming sessions are very important between all functional heads & top executives to set the tone at top. The sessions should cover:
1. roadmap & strategies both at organisation & functional level to achieve vision framework
5. product development trends & new product opportunities and lot more for exchange of thoughts.
The sessions also help in forming overall guidelines for budget process based on which each functional head can prepare a plan and budget for the concerned function involving maximum team members for success.
In the Brain storming sessions, Finance function shall check the scenarios, assumptions & decisions that were taken or not during these all uncertain times. This is very important, as different functions will have similar questions related to uncertainty response and recovery. What did well & what didn’t. What kind of scenarios could be possible during 2019, 2020 & 2021. Each function can bring their own understanding to the table & brainstorm on the future possible scenarios & response plan. Some organisations are relooking their M&A strategies and working afresh on acquisitions, joint ventures and spinning off along their supply chains. Those in more stable industries are considering new product launches and new technologies in the next normal. For example, a ceramic company is working on digital distribution models to complement its traditional go-to-market approaches.
Organisation can create central pool of funds (generally 10 to 15 percent of total budgeted opex & capex) which can help responding to uncertainties / setting trigger points & grabbing the business opportunity at the right time.
Another important change to be brought in is the change of approach from historical base to Zero Base Budgeting to understand well business drivers afresh & to reassess & eliminate many inefficient spending both in opex & capex. Knowingly or unknowingly, many businesses have been doing it in this uncertain time.
After brainstorming sessions, plans & budgets of Sales & Marketing, R&D & Production shall be worked first & then followed by other functions.
All plans & budgets must be prepared on at least three scenarios- pessimist, realist & optimist.
All plans & budgets shall be validated by Finance / Corporate Planning. Some examples of validation criteria-
Recorded Working Notes/ Assumptions.
Classify expenses in Variable & Fixed Category with defined base.
Use combination of History & Future, Forecast & Target.
Cross validation of each plan & budget with connected functions.
Cost optimization focus. Competitor benchmarking strategy for validation of certain costs.
After the inputs from Finance / Corporate Planning, plans & budgets are presented to top management in one to one session or in joint sessions with key strategies and critical success factors. Inputs are incorporated. Finance function / Corporate Planning acts as a driving force throughout the process.
Finalized plans & budgets are documented for implementation.
Entire cycle from Indenting of materials & services to payment can be mapped in the software for better budget controls at master& transaction level like Budget creation, release, transfer, supplement, controlling & reporting. Proper authorisation structure for all budget transactions shall be designed & implemented in system.
Make sure that the finance function is closely connected with crucial areas of planning & budgeting by clearly defining actionable key performance indicators. Finance function must adopt the proactive approach instead of traditional reactive approach.
Businesses must rethink decision making process connected to budgeting just like other strategic decisions as it really needs to be agile & speedier.
Budget Process – Monthly
The annual plans & budgets are converted into monthly plans, goals & budgets for execution. Plans & budgets vs actual achievements/ implementations are compared, analyzed, monitored on monthly or quarterly basis. The analysis with corrective & preventive action plan on strategies & operations is presented to top management / steering committee. Inputs are considered & incorporated in the next periodic plan.
Many organizations prefer monthly dynamic plan based on which budgets are tracked every month in system which becomes more important now.
The organisation shall focus on cash profits & proactively manage working capital cycle.
Critical Success Factors considering this new normal.
Agility & speed in budget processes & decisions
All functions & management’s Proactive participation
Monthly Dynamic Plan & Implementation by all
Timelines are essential for synchronization, as budget related activities are interdependent. Timely action on deviations can only be taken if timelines are adhered.
System support is must for real time & preventive actions, as controlling through manual mode will be challenging & ill-timed.
Figures shall be supported by analysis as numbers are outcome of the series of activities. KPIs of team shall be closely connected with budget activities & outcomes.
Integration of all functions with use ERP platform.
The businesses must utilize their learnings & still revamp budgeting exercise, most significantly to focus on big decisions linked to business transformation strategies, resilience and sustainability.