Budgeting and planning 2.0: How to keep your organization agile

It’s time to rethink the way you budget. Too many organizations rely on a budgeting and planning process that lives almost entirely in spreadsheets and depends on hours of manual work, a process that’s been in use for decades. While there’s some value in sticking to a process with that kind of longevity, it’s not the best method for organizations that need to adapt to evolving markets—which applies to all of them.

So how do you ensure your budgeting and planning processes set you up for success?

The state of budgeting and planning

Traditional budgeting and planning processes usually take one of two forms.

First is the bottom-up build, which begins with each department figuring out what their expected expenses will be for the year. If you’re doing this manually, the end result is a massive spreadsheet that covers budgets for the entire organization.

Second is the templates approach, in which each department starts with a template based on their expenses from the previous year, making a percentage adjustment based on forecasts or organizational goals. This may lead to an overall increase or decrease in budgets.

Both approaches have been around for decades, and they both have their advantages and disadvantages.

The challenges with manual, spreadsheet-based bottom-up budgeting

When you’re using manual processes and spreadsheets, the result of the bottom-up build is a giant workbook that covers every possible budgeting consideration across the entire organization over thousands of cells. These files are too often owned by a single person within the Office of the CFO, which can create a serious bottleneck come the beginning of the fiscal year.

Here are some of the issues organizations often run into with manual, spreadsheet-driven bottom-up budgeting:

• Too many assumptions. That massive Excel spreadsheet you end up with is full of assumptions from every contributor, making it difficult to know what they are—or how they came about.
• Too much effort. Using spreadsheets to build massive budgets takes time. A lot of it. The amount of time and effort can be decreased through automation and improved processes.
• Too risky. Relying on just a few experts to wrangle your budgeting spreadsheet doesn’t just create bottlenecks; it creates serious risks. These spreadsheets are often full of formulas, which can be broken by a single mistake. With the number of people adding data to your spreadsheet, there are just too many chances for those formulas to break—or other critical mistakes to be made.

While bottom-up budgeting in a spreadsheet seems logical and straightforward, it creates a slow, unwieldy process that results in overly complex budgets.

The challenges with template-based budgeting

At first glance, template-based budgeting seems like the ideal solution to overcome the challenges with bottom-up budgeting. Instead of relying on multiple unknown assumptions, departments adjust their budget based on previous budgets, the organization’s overall performance, and similar factors. And since they’re using a template, it takes a lot less effort than other methods. But templates aren’t a perfect solution, and they bring their own set of challenges.

• A single big assumption. Instead of unknown assumptions from each department, template-based budgeting relies on a single assumption: that an upcoming financial year will be similar to the previous year, plus or minus a few percentage points. While that may be true some years, it can make you less prepared for certain scenarios.
• Still high effort. Even when template-based budgeting is supposed to reduce the effort involved with budgeting and planning, it’s still one of the most labor-intensive methods out there.
• Error-prone. Excel templates rely on a ton of conditional formatting, formulas, and similar behind-the-scenes features that break easily if you’re not an Excel pro.

Templates are an improved approach to budgeting and planning in many ways, but they’re still not the best way to go. There is still a time and resource intensive aspect, and it creates rigid budgets that aren’t responsive to real-world conditions.

So, what should your organization do instead?

Why businesses should strive for agility in budgeting and planning

Agile businesses can make decisions quickly when responding to sudden internal or external changes—ensuring that they stay on track to reach their goals. With agility comes the mindset that adjusting everything, from budgets to forecasts and strategies, is essential to business growth. Organizations that want to make agility a part of their culture should consider the following benchmarks, as outlined in Prophix’s How Can Finance Leaders Bridge the FP&A Gap report:

• Velocity: Your organization should strive to take no more than a week to forecast earnings and revenue. Forecasts should cover a full year.
• Accuracy: Agility isn’t just about moving quickly. Budgets and forecasts should have a margin of error of 5%.
• Flexible budgeting and planning processes: Budgets, forecasts, and other plans should be able to handle minor changes, and these changes should be rolled out within half a day.

Few organizations can say they meet these benchmarks. In a survey of 500+ senior finance professionals, FSN and Prophix found that only 20% of organizations can forecast beyond 12 months, and less than half could forecast earnings or revenue within a 5% margin of error.

So why should your organization strive for agility in budgeting and planning processes? Not only will it make you more resilient to changing market conditions, but it’ll put you ahead of the competition.

How to reach budgeting and planning 2.0

Now that you’ve seen why agility is important in budgeting and planning, let’s cover how your organization can get there.

Use digital transformation to be more agile

The Office of the CFO is too often overwhelmed by data from disconnected spreadsheets across multiple departments. Digital transformation—like moving from spreadsheets to proper budgeting and planning software—is essential for centralizing data no matter where it’s coming from. By using modern, integrated platforms like Prophix, you can treat data as an asset rather than the overwhelming wave it is now.

A key part of this transformation? Automation. Imagine the most tedious aspects of budgeting and planning being handled automatically while you focus on high-value tasks.

Move to continuous planning

Organizations that have separate reporting and planning teams within the Office of the CFO often have multiple, disconnected processes for budgeting and planning—usually running on different schedules. Through continuous planning, you can unify these processes into a single workflow, which optimizes your resource spending while ensuring every team is working with the same key drivers for revenue and expenses.

Taking the time to do this means data can be handed off from one team to the next seamlessly—especially if you’re using the right tools. Every team refers to budgets and forecasts using the same language, and the insights you gain from both budgets and forecasts become significantly more useful.

Replace incremental planning with zero-based budgeting

Incremental approaches to budgeting and planning make one big erroneous assumption: “if it was true last year, it’ll be true this year.” That’s where zero-based budgeting comes in. Unlike both bottom-up and template-based budgeting and planning, zero-based budgeting eliminates assumptions. It encourages departments to treat each financial year as a blank slate, and ultimately creates a better representation of what their budget needs will be.

Zero-based budgeting is more agile, it helps manage data more effectively, and it supports re-forecasting—an essential part of building agile budgeting and planning processes.

Make agility a priority in budgeting and planning

Budgeting and planning 2.0 is all about promoting agility. Through digital transformation, continuous planning, zero-based budgeting, and other methods, the Office of the CFO can provide the organization at large with a more accurate view of the future, help mitigate business risks, and make the most of new opportunities. These techniques might be possible with manual planning processes and spreadsheets, but they work best when you use a Financial Performance Platform like Prophix.

Want to know how? Watch the demo.