Budgeting Essentials: The Only Way to Drive Financial Success

Budgeting is the process of translating the strategic roadmap for a company’s future into clear financial objectives. In the budgeting process, finance teams prepare new targets and key performance indicators (KPIs) including revenues, profitability, and cash flow for existing business lines and expected expansions.?

To master the budgeting process, finance teams would first need to analyze historical financial performance including available liquidity and productive assets to realistically align the company’s capacity to achieve future goals and identify the financing gap needed to reach the new targets.

Hence, the budgeting output guides management and decision-makers in regard to:

1. The company’s financing needs to achieve new milestones,
2. Proposing the direction for securing additional financing (Internal earnings, new equity raising, debt financing),
3. The way to utilize the new financing to grow assets and production capacity,
4. The impact of such new investments in assets to fuel revenues and cash flow.

Maintaining a flexible budget is the only way to growth

Most companies focus their efforts on setting and approving their forward-looking 12 months budget once by the end of each fiscal year; however, in more competent settings, budgets are reviewed and updated on a monthly and quarterly basis to maintain the deviation and variance (Up or Down) is priced in.

Differences Between Static Budget and Flexible Budget

1. Static Budgets:

• Nature: Fixed targets for a specific period.
• Goals: Evaluate performance against predetermined benchmarks without accounting for variations.
• Pros: Simple to construct and measure actual performance vs budget.
• Cons: High variances and divergence may take place without accounting for it and updating KPIs.

1. Flexible Budgets:

• Nature: Periodical updates (Monthly or Quarterly)
• Goals: Adjust the budget based on actual activity, allowing for more accurate performance evaluation.
• Pros: Management acts swiftly to business and economic changes to intervene in handling negative business developments and execute initiatives to boost performance.
• Cons: Needs update to date bespoke finance management. Which translates to more finance expertise hiring and costly tools.

Budgets Do Not Come in Unified Structures: Zero Budgeting vs. Financial Budgeting

The first time a company sets a budget, is usually done through the Zero-budgeting method. Some executives and Finance directors, usually prefer to consistently use this method of budgeting, although it takes a long period to conclude, yet provides attention to minor details.

For, companies that have historical performance and an ongoing budgeting process, the budgeting process can be focused on previous budgets vs actual variance measurements, to utilize the variances along with the new KPIs to easily build future budgets.

1. Zero-based budgeting:

• When to apply: A Company that is new or has not previously set budgets.
• Starting Point: Plan and justify every expected sale and expense one by one, to reach a final financial structure (financial statements).
• Pros: Helps executives have a better understanding of the detailed financial aspects.
• Cons: Take a long time to establish, and needs continuous future improvements.

1. Financial Budgeting:

• When to apply: An ongoing budgeting process with accuracy in measuring variances, and applying future budgets.
• Starting Point: Financial and variance analysis for previous budgets and actual performance, to build new year budgets including new expansion plans.
• Pros: Depends on collective experience in building and applying previous budgets, and easier to incorporate new developments.
• Cons: Needs high financial expertise that has an understanding of the process and industry benchmarks.

Slicing Budgets to Suit Every Stakeholder’s Objective

The primary recipients of the budget after conclusion are usually the Board of Directors to provide their approval for the budget. And preliminary to the Board of Directors Budget presentation, the CFO usually presents the budget to the executive management, which is the main party involved with applying the budget.

However, after setting the Company’s budget, it is usually sliced into operational budgets, that are directed to each department according to their main roles, in addition to capital and cash budgets that are directed to the finance and investment departments to make sure the cash flow management is on plan.

Strategic Budget Allocation to Optimize Corporate Performance and Direction

The reason the budget is sliced to several departmental objectives is for each stakeholder in the company to maintain their KPIs and performance is going on plan. So that all departments work in harmony to execute the executive management and board direction.

1- Operating budget:

• Involved Departments: Operations, Sales and Marketing
• Includes: Target revenue KPIs, in addition to approved operation, sales, and marketing spending, as well as the budget for new hiring and technology tools allowed for each department to achieve set KPIs.
• Reason: Operations, sales, and marketing directors lead on-ground execution, clientele acquisition; and hence, they must approve the budget allocated to them to be able to validate KPIs and targets set to achieve.

2- Capital Budgets:

• Involved Departments: Board of Directors and Executive Management
• Includes: Approved long-term strategic plans, investment opportunities, and funding needed split between equity fundraising, ability to finance through internal earnings, and new finance needed, with a projection of the cost of every financing method. And the optimal and projected returns on such financing initiatives in addition to the overall impact on the company’s growth, profitability, and cash flow.
• Reason: The executive management leads the contractual agreements and concluding deals involving financing and expansion execution.

3- Cash Budgets:

• Involved Departments: Finance Team and Executive Management
• Includes: Detailed day-to-day outflows and inflows by item, reconciled bank, treasury, and cash balances.?
• Reason: To maintain budgets are on track and reconcile cash balances with objectives set, to swiftly advise executive management in case of any divergence.

In Conclusion: Budgeting Is A Pivotal Element for Corporate Growth and Crisis Resilience

Budgets are essential, and as companies go into their growth phase, having a budget can make all the difference to ensure growth or apply crisis management mechanisms:

• Goal Setting: Setting clear financial and non-financial objectives aligned with the company’s vision, to guide decision-making.
• Budget Allocation: Prioritise and distribute spending based on set goals and target KPIs, whether across departments or business lines.
• Contingency Planning: The only way to set thresholds for crisis management is through keeping a flexible updated budget, and gradually building reserves to be able to maneuver unforeseen economic conditions.
• Governance & Reporting: Companies can only thrive through strict governance, which primarily involves strict budgeting practices, to ensure accountability, protect investors, and be able to abide by regulatory or investment mandates.

The Strategic Partnership Between Exits and Femto Is Leading The Way in Business Excellence

Navigating financial complexities is crucial for startups and SMEs. Femto, with its groundbreaking automated financial planning and analysis software, enables businesses to generate detailed reports within minutes, supporting data-driven decisions. Exits MENA complements this with its phygital advisory approach, guiding businesses through mergers, acquisitions, and fundraising.

This co-branded content represents a fusion of Exits' extensive advisory experience and Femto's technological prowess, aiming to provide businesses with comprehensive insights for success. In a rapidly evolving business environment, access to trustworthy resources and valuable information is paramount, and this collaboration endeavors to serve as a guiding beacon for businesses striving for excellence.? Keep an eye out for upcoming content designed to bring you valuable benefits.