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Budgeting: Garbage In, Garbage Out (Part 2)

Budgeting: Garbage In, Garbage Out (Part 2)

In last week's blog I tried to redirect the thought process about why budgeting and planning so often is broken, taking some of the blame away from the IT side of the business, and focusing more our own profession. We as finance executives too often lack the needed understanding of our businesses, and of what drives value, when we prepare budgets that our management can use to make key strategic decisions.

This week I want to point out several action steps and available resources to consider when your reviewing your own budget process. Everything here – three steps and three resources – is designed to make you think of your planning as a flexible, visual, and business-driven process that management will actively incorporate into their decisions.

  • While finance must drive the planning process, it cannot own it. Planning ultimately produces a financial forecast for cash, profit, and financial position. Finance can take charge of the process for preparing and presenting financial information. However, it must view this role as an active part of broader management decision-making. Finance must shift its focus from an inward view of the "right numbers" to an external coaching of managers about how to transform numbers into action. The executive team cannot think of planning as just an academic exercise, in which the finance people to flex their analytical muscle. Executives across the company’s functions must be actively engaged in the planning process, ensuring the organization's strategic goals are reflected in the pro forma financial numbers. When executives take planning seriously, the organization can align behind the figures, and we become strategic decision makers.
  • Less detail is actually more. Too many finance professionals, myself included, are proud of a detailed, line-item budget with spending projections for every single account. This mindset MUST change. Just like your local weatherman will only rarely predict the right temperature or rainfall in a forecast, we also must turn our focus from the precision mindset for our forecasts. Our forecasts must focus on the large spending categories and be more accurate than precise. Here is an example - I am coaching a solopreneur client who is starting a marketing and social media venture. While his chart of accounts has nearly 50 line items, we are focusing on less than a dozen categories in his forecasts. I have told him that his forecast must be simple to update and to understand. Creating a budget with 50 line items certainly won't be simple.
  • Static budgets are useless. The days of creating a budget before the year starts and sticking to that budget all year are long gone. In some cases, those budgets may be useless before the year starts if a major event occurs. It is more useful to consistently update your forecasts so you are always looking a set period of time into the future. This period could be 12 months, five quarters, or three years, but you must consistently update your forecasts to look at that time period.

I am always on the lookout for tools to streamline the planning process. Once we understand the business, THEN we can identify or design the process to deliver the right information in the most productive manner. Here are several tools for you to consider as you develop your budget process.

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Tags financial planningBudgeting

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