After months of improvising, CFOs recognize that they need real budgets for 202X to match resources with scenarios & strategy. They also realise that the business-as-usual budgeting process, with its traditional inputs & standard approaches, is no longer suited for the purpose.
Organizations who use the typical budgeting process, whether bottom up or top down, evidence-based approaches & performance-management systems acknowledge that data from these systems are not used to inform most budget & investment decisions. Without the information to identify where the opportunities exist to promote efficiency & effectiveness, Organization’s may unnecessarily, or even unknowingly, make crippling cuts to important initiatives. We discuss a few measures to transform the budgeting practice, making the process more dynamic & mission-driven.
Stress-test the budget through dynamic scenario planning.
Budget teams typically rely on annual straight-line projections, historical revenue, income growth rates & incorporate forward-looking macroeconomic data. A practice we bring from the COVID-19 pandemic is to use indicators beyond typical economic data points, to better understand how people/sectors behave & what economic activity might be returning. Taking a driver-based approach for specific revenue sources brings a further grip on projections. Similarly, progressive Institutions develop multiple scenarios for revenues & expenditures, using them to stress-test the budget. By forecasting revenue/income scenarios based on potential economic environments (and in the case of the COVID-19 pandemic, its progression), Organization’s use conservative projections to stress-test where there may be shortfalls or gaps in the budget & need a proactive response. More robust & frequent tracking of spending v/s receipt as well as corroboration, using statistical techniques, helps fine tune the correlation of market & economic activity movement to the budget & plan realization.
Surface new opportunities.
Rigorous debate during budgeting & planning is crucial to effective decision making, especially when considering major changes to budgets or programs or to surface opportunities to spur efficiency & effectiveness in service delivery & spending. Techniques aimed at enforcing objective, de-biased, & dynamic decision making in budgeting & planning discussions.
- Method 1, involves hosting challenge sessions, in which business units defend their budget needs to a set of peers & budget officers. This can be a helpful approach to find opportunities for spending reductions. Also using benchmarks, best practices & analytics help identify new opportunities and helps set an aspiration that agencies did not know was possible.
- Method 2, is where two groups take opposite sides for a particular decision. Such an approach is helpful for budget directors reflecting on which initiatives they would like to undertake to save money or to improve the delivery of, as it often surfaces new information that would not otherwise be considered.
- Method 3. ROI-based or rank-ordering approaches to current & new spending & priorities, developing a portfolio of projects by weighing them by impact & investment. Quite often, impact is not about profitability alone, like within a Liabilities business of a Financial Institution or with Governments and is about contribution to mission outcomes. This also necessitates risk adjusted profitability measurement. Just undergoing this ROI-assessment process can facilitate a portfolio mindset in which leaders can have productive discussions about allocating resources to advance particular goals.
Tie performance management to the budget.
For Organization’s looking for ways to prioritize outcomes even as budgets contract need to fully integrate performance management & financial management, ensuring dollars spent can be accounted for & goals achieved as efficiently as possible. Budget officers should bring financial data into every performance management discussion & release of budgets depend on alignment with the budget.
Centrally held spending.
In most Organization’s, budgets are fixed for the year, but in response to the COVID-19 crisis, many businesses have had to be more flexible, shifting resources as needed to survive, taking a modular approach to budgeting & by building options & contingencies into budgets. Here, budgets include a centrally controlled corpus of funds (a % of an Organization’s spending, retention of nonrecurring revenue etc.) to be used when certain triggers occur. The centrally managed funds are used to support variable-cost categories and released in stages throughout the year to support capital expenditures, R&D projects, hiring initiatives etc. Under such an approach, projects are broken down into phases, & each phase is subject to a go or no-go decision. The overarching goal is to allocate resources with more agility so that funding can more closely mirror rapidly changing industry & business demands. Some companies encourage venture-capital-like pitches from division & business leaders for additional funding within the year to fuel growth.
Zero-based budgeting.
Extensively referred to in literature, this ground-up build of a budget, is not easy to execute & explain to shareholders. The essence of this approach is to translate aspirations into budget needs, rather than just explain how this year compares with the last. In COVID19 affected industries, whether CFOs realize it or not, they have been using zero-based-budgeting principles & approaches to determine what levels of spending are truly required to keep the lights on or to support recovery efforts.
Keeping data in one place.
Strategic planning, P&L planning (Revenue, Expense), Balance Sheet planning, Cash-flow planning, Capital planning, HR and Workforce planning, Production and Capacity planning, Sales and Operational planning, requires a huge quantity of granular & reconciled finance and operational data. It serves Organizations well to have properly designed data-marts, suited for purpose, to be able to run budgeting, planning as well as carry out frequent review & realization assessments.
Authored by Kapil Raghavan. Chief Executive, Total RegTech Solutions.
Total RegTech helps Organization’s across the Middle East, Africa & the Indian Sub-Continent address Finance, Risk and Compliance issues and turn them into a business advantage. Reach us at contactus@totalregtechsolutions.com for information on cutting-edge & unified solutions covering finance data mart, cost allocation, transfer pricing, profitability, budgeting, planning, analytics, consolidation, close, reporting & disclosures.