"Maybe it's time to stop treating budgeting as an annual battle and start seeing it as an ongoing dialogue about what we really need to succeed." – Finance Director at Company X
At some companies, like Company X, the budgeting process looks like this:
Departments pad their budgets, knowing they'll eventually be cut anyway
There’s no clear alignment between budget allocations and company strategy
There’s poor communication between departments about shared priorities
There’s no accountability for budget overruns
The whole process is plagued by rigid annual planning that couldn't adapt to changing needs
For this company, this ended up with departments exceeding their budgets over and over again, and then blaming other departments.
"If Engineering delivered on time, we wouldn't need so many support staff," Marketing argued.
"If Marketing stopped promising features we haven't built yet, we wouldn't be rushing development," Engineering countered.
"If anyone had listened to our capacity warnings last year..." Customer Support began, but was quickly drowned out.
The company ended up missing its profit targets by 15%. The board was asking tough questions, and three major projects were on hold due to resource constraints. And the Finance Director was left holding the bag.
How many other companies are stuck in the same cycle: plan, exceed, explain, repeat. The numbers might change, but the story remained the same.
The budgeting process is crucial for the financial health and planning of any business. A well done budget should tell the story of the company for the next year through financial guidelines and operational metrics. The budget should be guided by the businesses’ strategic initiatives and have the input and buy-in of all stakeholders involved. This is both a top-down (high-level strategy) and bottom-up (detail-oriented) approach.
The budgeting process should end with agreed upon allocation of funds to various departments or projects, providing a base for leadership and investor expectations. It is the yardstick to measure activity against, as to whether the company will fulfill its strategic goals.
There are many uses for a budget. Some include:
alignment on strategic business initiatives
anchor for variance analysis
basis for annual bonus plan
align KPIs with financial plan
etc.
Strategy-based budgeting
Strategy-based budgeting means making decisions about expenses based on the goals and constraints of your business.
Strategy-based budgeting means setting clear goals and limitations, like:
We want to get to X% gross margin this year on Y product.
We can’t spend more than $X this year because Y.
We’re launching a new product this year – so we should anticipate $X expenses.
Then, you figure out how to budget in a way that helps you achieve your goals.
Too often, budgeting happens in a world totally disconnected from the financial state and goals of the business – caring about these details has enabled our CEO Ariel Menche to find millions in unnecessary spend with clients over the years, both at Raftel Strategy and before he began Raftel while working at KPMG.
Checklist for Budgeting Process
Set Clear Strategic Goals (leadership):
Ask Key questions:
What are my long-term plans?
What is my strategy to grow?
What is the go-to-market plan?
A strategic goal should describe an attainable, actionable plan.
Good example: Reach target revenue by entering the Asian market with our Core Offering through our strategic partnerships with XYZ Corp.
Bad example: ‘Grow Revenue by 5x by year_’
More on how to define good strategy here.
Break your long-term goals down into business initiatives, based on the answers to the above questions.
e.g. Asian Market Launch, Supply Chain revamp, and the Internal Referral Program
Evaluate your resources (financial, human and technological) and Identify the trade-offs.
Choose a small number of initiatives for the coming year that you can commit to and that are within your capacity to execute on.
Set Annual Goals with the strategic initiatives for this year
(Business Unit heads)
Make sure these have $$$s
Ask: What are the high level KPIs that drive your income statement
examples are: Operational activity metrics, $ per Unit, activity per labor hour
Determine what are your operating units? Will the model be broken down by countries, products, departments or business units?
Identify accounts associated with each operating unit
e.g. department-level initiatives
Gather inputs from the business leads for needs to achieve strategic goals + status quo
Interview budget owners to understand the resources that are needed to achieve the strategic initiatives and in what timeline.
Answer: What tasks are needed to accomplish these initiatives and how much will they cost us?
e.g. For the Asian market launch in Q3, you may need to hire local Asian team at $XX a month and conduct an in-person focus group through an outsourced agency in Q1.
Discuss and answer: What targets do we need to hit next year to accomplish these initiatives?
Set metrics that are SMART (Specific, Measurable, Attainable, Relevant and Timely).
Some helpful questions to ask when evaluating new tools and vendors, can be found here.
Model out the year
Review the Status Quo:
Review P&L and Balance Sheet for the past 2 years
Layout the status quo expenses by team and account
Layer on New Initiatives:
Add additional headcount and non-staff operational costs for each individual initiative (based on interviews held previously with budget owners)
Forecast the Revenue and Cost of Sales impact of new initiatives
Sense check the Model:
Check for conflicts in assumptions.
Align with leadership
Present the budget draft and get feedback from leadership.
Do Round 2 based off of leadership input
Flex goal - have different budget levels based on different market scenarios
Regularly review your budget and make adjustments as necessary to stay on track.
By following these checklists and maintaining a disciplined approach to budgeting, businesses can better manage their finances, achieve their goals, and ensure long-term success.
And of course, if you would like to get a little clarification and objective help with your budgeting process, you can always talk to us. Raftel Strategy has helped 80+ companies streamline financial operations, provide guidance through transactions, and optimize cash flow. If you think we might be able to help you, contact us.
SUMMARY:
A well done budget should tell the story of the company for the next year through financial guidelines and operational metrics
The budget is the yardstick to measure activity against, as to whether the company will fulfill its strategic goals
Strategy-based budgeting means making decisions about expenses based on the goals and constraints of your business
The strategic goals you set should describe an attainable, actionable plan
Set metrics that are SMART (Specific, Measurable, Attainable, Relevant and Timely)
A disciplined approach to budgeting will help your business better manage your finances, achieve your goals, and ensure long-term success
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