The 100-year-old management process – budgeting

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Almost 300 years ago, a new process was invented: Budgeting. Originally, it was invented for the English public sector to keep the King’s power in check. In 1922, James McKinsey popularized it as a management process, and this is where the 100-year-old management process began.?

Fast forward to today. What are you busy with right now? A good guess would be “Budgeting”. Not just because “that time of the year is approaching” for most companies, but also because many companies use between four-six months to complete the Budget. The whole finance organization is not busy at once but will have more or less involvement during the budgeting process.?

There has been much bashing of the process, but recent data shows that 85% of companies have a budget for 2024. Instead of discussing all the good reasons why you shouldn’t have a budget, let’s talk about the benefits of budgeting and present five hacks to improve the process.?

First, let’s debrief on a typical (bottom-up) budget process.?

• Guidance: Ideally, the budget process ties into the company strategy, and initial guidance and target setting will flow from the company’s five-year plan or similar.
• Timeline: It starts with FP&A sharing the budget timeline and how the process will be run so everyone knows their workload, roles, and responsibilities.
• Assumptions: The first milestone is when assumptions are shared, which usually contain some general economic drivers like growth rates for the largest markets, inflation, and interest rates, as well as some company-specific drivers.
• Templates: The second milestone is when reporting templates are shared. Many companies have planning systems where updates can be made directly, whereas others use a spreadsheet-based approach, where templates are distributed and collected via e-mails.
• Local data: Once templates are received, local entities can gather input. This usually includes gathering and local budget meetings to align on the submission. Often, it’s driven by local finance teams, but it could also be done directly by the business.
• Budget meetings: As part of the local submission, entities would be called for meetings with the next level up in the organization to discuss the input. This usually includes some challenges with the numbers and subsequent adjustments before final submission.
• Enterprise budget: In principle the budget meetings can take place several times over at different levels of the organization, however, at some point a final consolidation is made at which time the enterprise budget is ready for presentation.
• Management presentation: Now, it’s time for FP&A to present the budget to management, and quite some time is spent crafting the storyline to present a crisp and clear view of the business performance for the coming year. Like at the budget meetings, this final presentation usually includes many challenges and subsequent adjustments.
• Board approval: The final milestone is when the board approves the budget. Even the board would likely request adjustments. These adjustments are usually made as top-level management adjustments, and management may also decide to include some management reserves.

Every step of the way is an iterative process that could include multiple versions and long, late hours of work to meet the next deadline. The process can be fun and exciting but also head-scratching and frustrating. No matter what your experience is like, we can probably all agree that it has potential for improvement.?

5 hacks to improve budgeting?

Much has been written about the budgeting process. It is almost unfathomable to suggest new ways of running the process. However, there are still quite a few hacks that you can consider. Here’s our top five.?

1.?Use AI for initial drafts: Employ artificial intelligence to generate initial budget drafts based on historical data and trends. This can save time and provide a solid human review and adjustment starting point.

2.?Budgeting sprints: Conduct short, intensive budgeting sprints (e.g., over a few days) where all stakeholders focus exclusively on the budget. This can speed up the process and ensure concentrated effort and collaboration.

3.?Create a “Budget War Room”: Set up a dedicated space (physical or virtual) for the budgeting team to collaborate, discuss issues, and make decisions in real-time. This fosters a focused environment and reduces communication delays.

4.?Automate audit trails: Implement tools that automatically create and maintain audit trails for all budget changes. This enhances transparency, simplifies reviews, and ensures accountability.

5.?Pre-set queries for data collection: Develop and distribute a set of pre-defined queries for data collection from various departments. This reduces back-and-forth communication and ensures consistent data input.

These are only some of the radical hacks we could have selected. You could use smart contracts that automatically change your budget/target based on actual performance, use AI-assisted negotiation bots to handle the initial budget challenge, or work with crowdsourced budget initiatives where projects are put on a central platform and voted on by employees. Let’s focus on those that are more feasible to implement for now.?

Your implementation plan?

None of these hacks is dependent on the others, but each will amplify the other’s effect. Here’s how the implementation could look from a practical perspective.?

• AI drafting: Integrate AI tools capable of analyzing financial trends and producing draft budgets. Use these drafts as starting points for detailed review and adjustment by finance teams.
• Intensive sessions: Schedule dedicated budgeting sprint sessions involving all key stakeholders. Ensure clear goals and agendas for each session to maximize productivity.
• Centralized hub: Set up a physical or virtual space where the budgeting team can collaborate continuously during the budgeting cycle. Equip it with the necessary tools and resources for effective communication and decision-making.
• Track changes: Use software that logs all budget changes automatically. Ensure all stakeholders access these logs for transparent tracking and auditing.
• Standardized queries: Based on historical data needs, develop a set of pre-defined queries for each department. Distribute these queries at the beginning of the budgeting cycle and guide how to respond.

You may think you need a radically different process, such as rolling forecasts, zero-based budgeting, or even going beyond budgeting, to gain a competitive advantage. Going radical may gain you a competitive advantage, but it may also lead you to budget multiple times per year. Instead, since 85% still do budgets, you can gain much simply by improving the process.?

These hacks will likely be an upgrade to your existing process; at least some won’t require much to implement. What changes have you made to your budgeting process last year? What changes are you planning for the coming budget period? What other hacks would you suggest to the budget process?

This was the fourth article in our new series, "Hacking the Annual Wheel in Finance." In it, we will explore different hacks to transform our standard work in Finance. You can read the previous article(s) below.

Hacking the Annual Wheel in Finance

Hacking the Annual Report - The Holy Grail of Finance

Month-end reporting - the dreaded never-ending finance cycle

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Anders Liu-Lindberg is the co-founder and a partner at Business Partnering Institute and the owner of the largest group dedicated to Finance Business Partnering on LinkedIn, which has more than 12,000 members. I have ten years of experience as a business partner at the global transport and logistics company Maersk. I am the co-author of the book “Create Value as a Finance Business Partner”, a long-time Finance Blogger, a LinkedIn Learning instructor, and a Top Voice on LinkedIn with 350,000+ followers.