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The Budgeting and Forecasting Process - All You Need to Know

July 20, 2021
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For business leaders, improving the efficiency of internal processes is a top priority - especially in today’s dynamic business environment. The budgeting and forecasting process is no exception as it provides strategic insights that support decision making and goal setting - both of which are critical elements of a company’s success, especially during times of change.With that said, it’s important to understand what budgeting and forecasting are, the common challenges, how to improve and streamline the process along with factors to consider when looking for a solution.

What is Budgeting?

Budgeting is the process of building an estimate of an organization's revenue and expenses based on the current business environment. The resulting ‘budget’ is an initial stake in the ground outlining a company’s expectations for the next 12 months, essentially summing up where you want your company to be by the end of the given period. The budgeting process is a strategic exercise, one that helps the management team set goals for the company and communicate them throughout the organization.

What is Forecasting?

One definition of Forecasting is “a planning tool that helps management in its attempts to cope with the uncertainty of the future, relying mainly on data from the past and present and the analysis of trends.” In essence, forecasting provides a roadmap of where your business is expected to go that’s based on historical data and business drivers. Typically, forecasts are updated regularly and used for short-term planning.

Budgeting vs. Forecasting

Here is a high-level view into key differences between budgeting and forecasting:

Common Challenges with the Budgeting and Forecasting Process

Like clockwork, the business budgeting and forecasting process comes along each year. And without fail, many CFOs and budget managers struggle through it. Many organizations are so overwhelmed by data collection, they have little time for analysis or planning, which is reflected in the output and accuracy of their budgets and forecasts.While your business budgeting and planning process may be far from perfect, mitigating even a few of the biggest red flags can lead to dramatic improvement in the overall process.To start, many organizations take a budgeting and financial forecasting approach that relies heavily on historical data. While that might have worked well in the past, now we are in the midst of a data explosion. When real-time numbers can be delivered within the minute, using data that is months old already sets the budget and forecasts up for inaccuracies.

Actuals, budgets and forecasts should be compared and evaluated on a consistent basis. This allows for a more accurate budgeting and forecasting process and can highlight potential risks as well as opportunities that lie ahead.It’s also important for CFOs to take a more unified approach to financial numbers and overall strategy. More and more, KPIs include non-financial indicators as well as data important across departments. Yet many CFOs and budget managers don’t feel as though budgeting and strategy are in full alignment.Data management is another area where CFOs will want to look for potential roadblocks. Time-consuming processes such as manual data entry can often overwhelm finance departments from doing actual analysis. This is where having a data management strategy becomes important. It allows for effective collection, analysis and presentation.And then there is the use of spreadsheets for budgeting and forecasting. While having a spreadsheet-based system can work well early on in your business, as you grow, more advanced tools are needed. Here is why:

  • No Single Source of TruthAs mentioned above, having the right data is incredibly important to any business—not only for the budgeting and forecasting process but for operational decision making as well. Unfortunately, using a spreadsheet-based system makes having the right data a challenge. Spreadsheets are often passed around to many different people and departments within the organization and many have their own versions of templates which may (or may not) coordinate with the ‘official’ version. This makes it extremely difficult to determine which is the ‘right’ version with the correct data - the single source of truth.
  • Difficult to Drill DownFor top-line numbers, spreadsheets are fine, but not being able to see the details beyond the top-line numbers - and drill down - will leave your business at a competitive disadvantage in both agility and decision making. It can also impact forecasts and operational strategy.
  • Poor Modeling CapabilitySpreadsheets become burdensome with modeling. There are only so many advanced calculations and macros that can be run on a spreadsheet before the system gets overwhelmed.

How to Improve Your Budgeting and Forecasting Process

Technology Steps Up to the Plate

Today, many businesses look to harness technology to help them make better decisions. Organizations are determined to be more agile. Any CFO knows market demands can change quickly, and the organizations that are poised to see opportunities can capitalize on them. The traditional business budgeting and forecasting process makes that very difficult.That’s why technology, and especially automation, has become so important in aiding the budgeting and forecasting process. The key with this technology is it allows for budget managers and CFOs to improve two important features.First is the process around the creation of the budget. Technology can build in systems that automatically sync with the general ledger. This helps to keep data accurate not just to the week, but to the minute, dramatically reducing potential errors.Second, automation allows organizations to improve the monitoring and reporting of the business budget and forecast in real time. This is key for the future health of the organization. Improved technology and data automation can create reports that can compare historical data, improve dashboards and generate what-if scenarios.For the organization that wants their key decision makers to be agile and move quickly, technology and automation are an important part of the way forward.

CFOs Go Strategic

As CFOs have positioned themselves as strategic partners, they should be the ones driving the charge toward better technology and automation.The main benefit, of course, is this is going to help improve the overall business budgeting and planning process. It will allow for everything from better coordination between departments, to data gathering, modeling and projections. All of this can dramatically reduce the time devoted to the menial tasks behind the process, leading to more efforts towards analysis and improvements. This is something that has been long overdue in so many organizations.Another key factor is that CFOs have established themselves as key players in the strategic decision-making process - and as the conduit between technology and data, they can champion a different way to budget that provides a more streamlined and accurate process.The technologically advanced organizations that move to automation and develop smarter ways to budget and forecast will certainly see the benefits in the long run.

4 Factors to Consider When Looking for a New Solution for Your Budgeting and Forecasting Process

Now that we have discussed what budgeting and forecasting are, the role of each in the FP&A process, as well as the challenges - next up, is knowing what to look for in a solution to improve your process.  Whether your company is finally moving from a spreadsheet-based system, looking to migrate from another package, or starting from scratch, trying to find the right solution is no small undertaking.Even setting cost aside, there are many things to consider when vetting potential budgeting and planning tools or platforms. Evaluating the software means understanding what it can do for you today, tomorrow, and well into the future.

1: How quickly can you start using it?

With some business budgeting and forecasting platforms, waiting is required because of extensive implementation processes and timelines.Not only does this push out the time before you can begin reaping the benefits of the platform, it drives up costs and disrupts the business – as well as waste the time of your own internal resources.If, however, you consider a cloud-based solution, implementation time from IT may be minimal, costs are reduced, and disruption to the existing process can be all but eliminated.

2: What’s the learning curve?

Learning a new software package can be daunting so pay attention to how easy the software is to use. Is there a high learning curve and a lot of training just to get up and running? How easy is it to create reports? Can the finance team manage the software internally, or will they need IT’s help?Whatever software you choose, make sure the vendor is ready and willing to help you with any questions you run into during set up and use.

3: What’s the technology stack?

Be sure that your new solution will run well for years to come, that it will run smoothly, and that it will operate well with current technology.For the business budgeting solution to be fast, efficient, and take advantage of the ability to import and integrate data from a multitude of sources, it must be built on current technologies. Advanced functions, like dashboards and reporting, require the application to utilize the underlying technology to the fullest. When choosing a cloud-based solution, it should be able to leverage the power of the cloud to give you fast and accurate results – as well as the necessary security.

4: How flexible is the solution?

If your business budgeting solution doesn’t allow for automation and collaboration or requires the finance team to reconcile data from multiple sources, the company can miss opportunities or experience detrimental data errors.The tool you purchase should also be more than just a budgeting tool.Flexibility and availability are key to getting the wide variety of input needed for an accurate budget. The platform should be an investment and with the right features and functionality to help the business budget, forecast, analyze, and understand where the company is and where it is headed at any point of the year in any business environment.

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