When to start your budget process

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If you hang out with a finance pro for long enough, you’ll learn that the budgeting process is a nightmare (most of the time).

And if you work in finance, it’s hard to explain why.

• New initiatives are coming out of nowhere

• Direction is shifting on a dime

• Everyone wants to see the new version of the budget ASAP

But there are a lucky few people who have figured out a simpler budget process.

We’re going to break down why that is and what you can do to make your budget process better.

Let’s jump in:

What a healthy budget process looks like

When the budget process is working correctly, you move from directional alignment to specific alignment with ease.

And you can clearly articulate the commitments being made by the business both in terms of how they fit with the broad strategy and how they influence the numbers.

Which means we need the right infrastructure to facilitate this process.

Here’s a few fundamental principles that are worth stewing on:

• The first and most important thing FP&A can do is establish a clear ‘base case’ forecast before any planning or budgeting occurs (more on this later)

• Specific initiatives are important, but you must first know what you are aiming for

• If your tools and models are clunky, get ready for an awful experience. The budgeting process requires speed and tight feedback loops, so either your models are fast or you are working late.

• At times, directional is okay. But other times, you need precision. Learn to identify which is which.

• A spreadsheet commitment means nothing if the business isn’t willing to actually do the thing - this is where I HATE unidentified savings initiatives in my budget. If the business isn’t motivated now, they won’t ever be motivated.

• On the other hand, mandating a budget from finance can be a smart move to force the business to drive change

• If compensation isn’t tied to the budget, it won’t get done

As you reflect on the above principles, where do you see pressure points with your process?

The number 1 issue is: timing

Your budget process likely feels frantic because it’s disconnected from the business planning process.

Until those 2 timelines are in line, you’ll constantly feel like you are either chasing the business for numbers or trying to get the business to make decisions they aren’t ready for.

Timing is critical.

Which means FP&A needs to be at our most proactive state around the budget season.

How can you do this?

First is understanding the flow of the process in total. If it’s your first time through or first time leading the process, make sure you understand the broader calendar:

• When are board meetings where the budget is approved?

• When are the ELT meetings where the budget is evaluated?

• When are the forecast due dates that will drive the budget?

• When is each ELT member discussing their budget with their teams?

When you put all these dates on a single page, you start to see the key moments and deliverables.

Where FP&A teams drop the ball is when a completely foreseeable timeline issue pops up and catches us off guard.

There are plenty of pivots and left turns in the budget, so make sure you lock down everything knowable.

Master the flow

If you zoom out far enough, you’ll see the same pattern in every budgeting process at every company.

Sure, it might be called something different and might feel different, but I promise it’s there.

Here’s the flow:

• Set your base case forecast

• Then use that to determine how much more/less you need to do to achieve long-term strategic goals

• Then work bottoms-up to establish a specific operating plan to achieve those targets

Let’s dive into each one of those:

Base case forecast

Where most business leaders believe the budgeting process begins with strategic planning, a solid base case forecast is FP&A’s main tool to measure the lift/impact being made by the initiatives.

I like to kick this off in the summer - just when everyone is snoozing on next year’s projections.

Forecast the next 3 years of the business in your forecast models based on the trends you currently see and anything currently in flight.

It’s your ‘do-nothing’ scenario that you establish prior to the strategic planning process that tells you ‘if this company does nothing different, then here’s what we’ll get’

Often the base case forecast is an uncompelling version of the company’s future: moderate revenue growth and increasing costs above inflation. Ewe.

But we need this ugly picture of the future in order to compare our strategic plan against…

Strategic planning

Sometime in the late summer or early fall, you should be working with business leaders to review your base case forecast and essentially have the conversation:

• “Is this where we want to be in 3 years?”

• “No”

• “Okay, so where do we want to be?”

Which is honestly a top-down exercise - meaning you’re targeting a revenue growth number, expense outlook, and gross margin number. Maybe throw in EBITDA and whatever the flavor of the month is for your CEO.

The strategic planning process can simply look like you forcing your forecast model to show what the goals are.

A better approach is to get close to the end answer you want by leveraging large initiatives with loose quantification, then goal seeking the rest via a plug.

Here’s how that might look:

• Base case revenue is +5% the next 3 years

• But the CEO wants to see +10% per year

• The CMO brings forward a new strategy to get to +7% per year

• The CPO brings forward a new product to get to +9% per year

• The remaining 1% is held as ‘unidentified initiatives’ or worse ‘sales effectiveness’

Remember, these are swag estimates that are probably overstated. But they serve as a great visual to show the board the direction you are heading and how you plan to get there.

Operating plan (budget)

Now it’s time to do some real math.

Dig deep into those initiatives the CMO and CPO brought forward and ask “are you willing to sign in blood that you’ll achieve an incremental +2% in revenue from your initiative?”

“Well…. ummmm… now that I take a close look at the timing and the potential headwinds…”

That +2% just dropped to +1%.

And the same thing happened with the CPO’s new product launch - turns out the timing of the launch was off in the strat plan.

Which means you are now only showing +7% revenue growth next year.

But the strategic plan has +10%!

What do we do???

During the strategic planning process there were likely a number of initiatives deprioritized, check out those first. But you’ll likely have to push your business partners to try to get back closer to the 10% number.

Often, the operating plan will fall short of the strategic plan.

The worst thing you can do it put so much ‘unidentified growth/savings’ in the operating plan that you have no shot of hitting it.

Our role is to balance those 2 facts and ensure the operating plan is strong enough to drive the business without being so unattainable that your best employees quit in frustration.

In summary:

The budget is no joke!

It’s like our olympics - it only happens occasionally and we need to be super prepared when it shows up.

And mastering the process can be the difference between sinking or swimming (pun intended).

Understand the calendar, then use it to drive out gaps and inconsistencies in the process.

Base case > strat plan > op plan (budget)

Next week we’re going to continue on our budgeting mini-series. Stay tuned!

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