Like clockwork, the business budgeting and forecasting process comes along each year. And without fail, many CFOs and budget managers struggle through it. Many organizations are so overwhelmed by data collection, they have little time for analysis or planning, which is reflected in the output and accuracy of their budgets and forecasts.
This leaves CFOs frustrated. Far too often, a poor approach to budgeting and forecasting leads to inaccurate numbers down the line, which can then lead to increased risk and a less agile business.
Studies highlight this general frustration as well. A recent report from Grant Thornton found only 37 percent of chief financial officers and finance leaders say their organization’s approach to annual budgeting is valuable.
That leaves quite a bit of room for improvement.
And yet the same mistakes are seen over and over again. While your business budgeting and planning process may be far from perfect, mitigating even a few of the biggest red flags can lead to dramatic improvement in the overall process.
Below, I have outlined some of the most common mistakes made in the budgeting process, as well as a few suggestions on how to combat these mistakes.
The ‘Red Flags’ in Budgeting and Forecasting
Over the last few years the role of the CFO has evolved from number cruncher to strategic decision maker. With that new responsibility comes opportunity.
CFOs and budget managers can be the bridge between the old way of doing things and one that is more streamlined, collaborative, and most importantly, accurate. To do that, CFOs and budget managers must face the common roadblocks to accurate budgeting.
Many organizations take a budgeting and financial forecasting approach that relies heavily on historical data. While that might have worked well in the past, now we are in the midst of a data explosion. When real-time numbers can be delivered within the minute, using data that is months old already sets the budget and forecasts up for inaccuracies.
Actuals, budgets and forecasts should be compared and evaluated on a consistent basis. This allows for a more accurate budgeting process and can highlight potential risks as well as opportunities that lie ahead.
It’s important that CFOs realize they need to take a more unified approach to financial numbers and overall strategy today. More and more, KPIs include non-financial indicators as well as data that’s important across departments. Yet many CFOs and budget managers don’t feel as though budgeting and strategy are in full alignment.
Data management is another area where CFOs will want to look for potential roadblocks. Time-consuming processes such as manual data entry can often overwhelm finance departments, preventing them from doing actual analysis. This is where having a data management strategy becomes important. It allows for effective collection, analysis and presentation.
Developing a Budgeting and Forecasting Solution That Works
Undoubtedly your organization has encountered at least some of the above issues in your budgeting and forecasting process. These are often the biggest culprits in derailing the process. There’s no need for businesses to continue on a path that can lead to inaccurate numbers and increased risk.
Instead, take a 30,000-foot view of the overall business budgeting and forecasting process. Look for key bottlenecks. And ask some key questions:
- Where can your current budgeting operation be optimized?
- Where are redundancies hampering progress?
- What activities are the most time consuming for the budgeting and forecasting team? And can these be streamlined?
- How can communication be improved across all departments?
- Does the budget reflect the overall strategy of the organization?
And so on.
In doing this your organization may quickly identify a few bottlenecks and adjust accordingly. Or you might find that a different approach to budgeting is needed. Perhaps your organization would be better served by rolling forecasts or quarterly planning updates.
Any way you slice it, the budget and forecasting process is a serious undertaking. However, developing a set of key enhancements is the first step in optimizing the entire operation and seeing improved results.
To learn more about the key capabilities that are needed for all key stakeholders to have input and visibility into plans, budgets, and forecasts, check out Aberdeen’s comprehensive research report, Enable Collaborative FP&A for More Accurate Forescasts and Budgets.
John Orlando is CFO of Centage Corporation