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

2. current business challenges

3. financial history of relevant years

4. capacity utilisation trends & capex opportunities

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-

•     Commercial feasibility

•     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.