Insights from a Finance Business Partner Budgeting : Significance and Practical Challenges

A. Why Budgeting is important for Businesses

It is part of our human nature to control and influence the activities around us. One way of doing it is through budgeting. It encourages you to plan and assign resources for your future actions.

Businesses are not different. Whether it is a private company or a public company, each one of them measures their performance at least on an annual basis. This leads to annual budgeting activity.

Businesses set short term and long term objectives and to achieve those, different strategies ( course of actions) are worked out. These strategies require multiple resources ranging from financial to human capital. They may involve partnering with an external party.

Without provision of these critical resources strategies remain merely as ideas never brought to life.

It is therefore of utmost importance for any sustainable business to allocate resources effectively and efficiently for these strategies. Furthermore, businesses involve agency, the tactical objectives and strategies are carried out by teams other than owners. Therefore, it is essential that these are aligned and approved by business owners.

This all is made possible through annual budget activity that list downs all the key objectives and activities for the next year and accordingly the resources required for those activities.

Imagine yourself spending money at the whim without checking inflows and outflows. You will end up buying stuff you do not need with either low savings or increased debt. Businesses situation will be much worse than that.

B. Key practical challenges in Budgeting

1. Lack of Sponsorship

Involvement from Senior Leadership and business team is of paramount importance to get desired gains from Budgeting. However, this is not always the case and sometimes, top leadership of business such as CEO and General Managers do not take budgeting activity as serious. This results in a backward focused budget as finance does most of the work without active collaboration from the business. Resultantly, the whole purpose of the activity gets drained with business operating more with a reactive approach.

2. Logistical challenges

Although the budgeting activity was performed, however, the templates that were used to capture information were not up to the mark. This compromises the overall process and output.

3. Focus on accuracy over direction

The only thing that is constant in this world is change and therefore budgets provide a good direction and reference point for the business. However, budget will never be accurate except in some rare cases such as public companies that have predefined spending targets. This means that a balance should be targeted between accuracy and direction.

4. Timings

Budget activity should be done before the start of year so that proper actions are taken however sometimes it is delayed leaving people feeling disoriented with respect to company’s approach. For instance, consider plans to build a new facility or to acquire new assets being put at risk due to delay in budget exercise or approval.

5. Not challenging the assumptions and norms

One of the key value addition by finance for business is to challenge and validate the assumptions and norms used in preparing budgets.

6. System related issues

Once budget is approved the question is should it be implemented on a monthly, quarterly or yearly basis ? Should it be implemented at a granular level or at nature of expense level ? It is important that company journey in terms of products and process maturity and staff capabilities are taken into consideration before taking a call on this. Else, a company may end up with increased clerical work for finance with budget stunting business operations.

C. Right Approach

Whatever type of budget your business follows such as activity based, incremental, value-based, zero based or a mixture of these, the important part is top management sponsorship and business alignment.

Although accuracy in form of calculations and norms is important, one should not over emphasise on these, rather a balance approach is best suited from practical and value addition perspective.

Budget serves multiple purposes ranging from securing financing from stakeholders to allocating resources and it is of essence to have clarity on purpose while preparing it.

Going through the same phase and want to discuss your challenges

If you are a finance business partner currently going through budgeting activity and wants to discuss your practical challenges and have a second opinion, you can reach out to me through following:

https://calendly.com/upskillmsj/30mins_business_partnering