For various businesses, the budgeting and planning process, although time consuming and demanding, is one of the most crucial activities of the year. A comprehensive budgeting strategy enables you to plan and monitor your cash flow, build a culture of spend effectiveness whilst boosting efficiency and competitiveness.
Guy Strafford, EVP, Chief Client Officer at procurement services provider, Proxima discusses five top tips for maximising the effectiveness of the budgeting process.
An effective budgeting process adds value, enabling businesses to understand how much money they have to implement strategic operations. It encourages spending effectiveness, and challenges developments and processes across the entire business.
However, failing to implement a strong budgeting process can create a catastrophic knock-on effect for all departments across the business. It can be limiting both from the perspective of achieving objectives and in terms of ineffective allocation of limited corporate resources.
There is one answer that comes to mind. Habit.
Many companies prefer to go through the budgeting process annually, and can become very accustomed to this practice. More often than not processes can become ritualistic and the existing practices are perpetuated. There is often no drive to fix what isn’t already broken and no identifiable advantages for doing so.
The benefits of an effective budget process go far beyond numbers. In most situations opportunities for financial savings will always be highlighted; while an effective budgeting strategy can also promote efficiencies, encourage innovation, challenge mind-sets and create a cohesive vision of success.
How can these benefits be realised? Below are five tips to help business leaders maximise the effectiveness of their budgeting process:
1. Review your current strategy: How do you currently approach the budgeting process? Do you follow a particular model and do you understand the advantages and limitations of this model? Have you considered any alternatives?
One increasingly popular budgeting model is that of zero-based budgeting. This transformational approach has been acknowledged for not only remodelling the budgeting, but also the cost management structures of companies such as Kraft and Heinz.
Bain and Co. suggest that zero-based budgeting “offers a practical way for companies to radically redesign their cost structures and cut as much as 25% of spending on overhead and support functions, whilst boosting efficiency and competitiveness.” However, there are a number of other alternatives. Review each one and decide which model will be the most applicable to your business, in relation to what you have in place today.
2. Include your procurement function from the start of the budgeting process: Procurement is in a unique position to capture and share new or critical insights from the supply market, in addition to the insights obtained from working alongside each division of your business.
Procurement’s holistic view of costs means it will be able to spot efficiencies and synergies within your business, as well as minimise any duplication or redundant spending. Including procurement in the budgeting conversation in the very early stages gives budget-setters access to this critical insight, enabling them to build effective and efficient annual plans.
Additionally, procurement can add value to the budgeting and planning process by advising on decisions and strategies for the year ahead – decisions such as make vs buy – by analysing movements in the supply market and feeding this information back.
3. Take a long-term view: If possible gather a two-to-three-year view of the budgeting process and fit in critical annual milestones to be achieved. The longer-term view means that all the good work that has been done this year isn’t lost next year, or that big projects that will deliver benefits beyond this year’s budgeting process can still be actioned.
Extending the last point, there would be benefits from engaging procurement in these long term conversations – especially for budgeters as they would have close working relationship with each division of the company. Procurement is well positioned to advise on the long-term strategic needs of the company and to influence the budget to achieve this by suggesting the best way for the company to get value for money in the long-term as well as the short-term.
For example, should your IT department decide to embark upon a new plan and invest in an expensive piece of technology this year as prices show signs of increasing? Or would it be wise to hold off for a few years and wait for a forthcoming innovation in the wider supply market? What implications will these decisions have on the operations of your business? Decisions such as these are critical for budget holders to consider.
4. Agree the governance behind the process in advance: Who is responsible for each aspect of the budgeting process, is it a sole responsibility or a cross-functional responsibility? Ensure that you agree on a governance structure around managing the challenges and targets prior to starting the budgeting process.
Employ the RACI governance model and map out the involved functions that are relatable. Specific budget targets allow each division to be responsible, but it is mainly procurement that is held accountable for achieving these targets.
Following this method provides divisional leaders with the support to work collaboratively and effectively with procurement in order to maximise value for money, reduce wastage, and create total spend effectiveness.
5. Encourage the right mind-set: It is important that everyone who is involved in the budgeting process is approaching the task from the same perspective. Ensure that your message highlights the bigger picture outcome that you would like achieve throughout the process.
Refer back to your procurement team to help influence internal stakeholders and cultivate an engaging environment. Good procurement teams can help encourage budget holders to think more creatively about how they are spending their budgets by providing commercial counsel around how to make costs more effective in the context of the business aims, rather than simply pushing for a percentage off last year’s number.
In summary, the implementation of a strategic and effective budgeting process is vital for the future of your business. It sets the tone for the business for the following year, challenges mind-sets and encourages collaboration. An effective budgeting process provides a means for growth, encourages innovation and creates a spirited culture that is conducive to spend effectiveness.