It is that season again. No, I am not talking about Thanksgiving or Christmas. I am talking about the year-end budget season. For all finance professionals, this is surely the more exciting one! Yet, more often than not, it turns out to be a hollow process that we follow without achieving the goals it is set out to do.
But fear not, with the right mindset and approach, this budget season can be a time of inspiration, innovation, and opportunity for growth. So let’s delve into this process with enthusiasm and determination, as we work towards achieving our financial goals and setting our organizations up for success in the year ahead.
Top-down expectations align with bottom-up numbers
Founders and chief executives are the ones with the grand visions in mind. They set out the five-year blueprints for the team to strive for. They do most of the strategy works and often have an optimistic bias. Simply put, it is their job to set out an exciting and inspiring path for the company to follow. However, it is the CFO’s job to ground those aspirations in reality and ensure that they are feasible. Together, the founders and CFO create a practical and achievable plan in regard to where the organization can realistically grow in the next twelve months.
A weak CFO might surrender to the grand vision and fail to bring to light the gap between the aspiration and the reality. Whereas a strong CFO will be honest and upfront. This difference in approach can have significant consequences for a company’s sustainable growth. Failing to disclose potential risks and challenges that could negatively impact the vision, causing financial setbacks and potentially leading to the failure of the business. On the other hand, a strong CFO will carefully evaluate the feasibility of the grand vision and identify any gaps or weaknesses that need to be addressed. This proactive and honest approach is critical in creating a successful operating budget that works.
Convert financial KPIs to operational KPIs
Financial KPIs, or key performance indicators, are vital to measuring the financial health and success of a business. However, all financial KPIs are derivatives of operational metrics. By converting financial KPIs to operational ones, you turn numbers into actions or day-to-day business activities that will generate the desired financial results. By doing so, you also gain deeper insights into the underlying factors driving your financial results. This allows you to identify and address areas where operational performance can be improved, ultimately leading to better financial outcomes.
For example, every company sets revenue targets. If we break it down we will arrive at the number of contracts needed and the average contract value required. In order to obtain the said number of contracts, we need a number of contacts in our CRM which can be further translated into numbers of phone calls, meetings and email outreach. Now these can be allocated to each account executive/salesperson. At this stage, we complete the financial KPI to operational KPI conversion.
Align stakeholders and hold them accountable
Creating an operating budget can be a daunting task, but it is key to the success of any organization. One way to ensure that the budget is aligning with the goals and objectives of the company is to involve all stakeholders in the process. Once a draft operating budget has been created, it should be shared with all department heads for comments and feedback. Afterall, they are the ones who need to OWN the budget — these individuals are the ones who will be directly impacted by the budget and ultimately responsible for its implementation. By involving them from the initial stage, they can take ownership of the budget and feel more invested in its success. This approach not only helps to align stakeholders, but also holds them accountable for their involvement in the budget process. It fosters a sense of teamwork and promotes a cohesive understanding of the financial goals of the organization. Let’s remember, a successful budget can only be achieved when everyone is on the same page and working towards a common goal.
Variance analysis – learn from prior year’s success and mistakes
Every top athlete in the world spends a significant amount of their time watching replays and studying their own performance. It is a crucial part of their training and development. They can identify areas for improvement, spot mistakes that may have gone unnoticed in the heat of the moment, and strategize for future competitions. This attention to detail and constant self-reflection is what sets the best athletes apart from the rest.
There is no difference in business. Yet this is the part of the process that often gets overlooked. Oftentimes, we see a one-line comment next to the variance line with no further actions or investigations happening. Yet, this is a golden opportunity to dive deeper and understand what exactly happened and what can be done so that we won’t miss another revenue, cash flow, or profitability target.
Building a business is a sport. Without taking the time to reflect and adjust, it is easy for a business to become stagnant or fall behind the competition. This is why constant self-reflection and adaptation is essential for any business looking to thrive in a competitive market.
And that’s it. If you can nail the above four, you have created an effective operating budget. But don’t think your work is done just yet. A successful operating budget needs to be constantly reviewed and adjusted as needed in order to stay on track and achieve your financial goals. This means regularly monitoring your expenditures, keeping track of unexpected costs, and making necessary changes to stay within your budget. Remember, an effective operating budget is a living document that requires active management and fine-tuning. With dedication and diligence, your budget will continue to serve as a valuable tool for financial success.