1. Global
Finance
360
FINANCIAL BUDGETING
THAT MATTERS
8 TIPS FOR A BETTER BUDGET
Author: Stephen G. Lynch
.
” To achieve Speak with virtually anyone involved with the annual budgeting process and they’ll tell
you that it’s painful: time consuming, difficult, error prone, and based more on politics
maximum value, than on valid economic assumptions. The worst part, however, is that the budget is
viewed as obsolete almost as soon as it’s complete. Despite these challenges, most
managers will corporations are tied to the traditional budgeting process as they don’t believe they
have anything better to replace it with.
need to reinvent
Fortunately there are companies who have scrapped the traditional notion of a budget
their budgeting and have replaced it with something much more useful. They still have a budget, but
their updated budget has been streamlined. No longer do they put themselves through
process to make it the long and difficult budgeting process; rather, they focus on creating a budget that is
far less detailed but that communicates the key ideas of the planning process.
more meaningful.
In leading The Goals of Budgeting
organizations, the The annual budget and the budgeting process serve a number of goals. Among them
are:
financial budget
Link operational plans from multiple departments. The budgeting process,
represents the as opposed to the actual budget, fosters communication and enables the
coordination of business unit and departmental activity across the organization
culmination of an
to support the achievement of strategic plans.
effective process
Capital allocation. One of the key aspects of the budget is to decide where a
that translates company will employ its resources. Strategic plans around new products and
markets, research and development, production capacity and other
strategic dimensions will feed directly into the budget.
objectives and Performance monitoring. The control of capital and the early detection of
deviations from establish plans have also been key elements of budgeting.
operational plans Reports comparing the variance of actual results from budget are a standard
component of management reporting packages.
into financial
Compensation rewards. Many executives have a portion of their pay linked to
plans.” the attainment of budget goals. The targets established through the strategic
planning process are incorporated into the budget and ultimately into the
annual performance plan for these executives.
The Problem with Traditional Budgeting
Budgeting as a tool can be very useful but the traditional budget is a product of a
th
distant past. During most of the 20 century, manufacturing dominated the industrial
landscape. These businesses were hierarchical and capital intensive. It was the job of
managers to oversee the deployment and allocation of capital. To do so, they needed
strict controls over capital allocations and information to understand how closely they
were tracking to their financial objectives during the year. Couple this with a business
Global Finance 360 | Copyright 2011 | All Rights Reserved 1

2. environment that was minimally impacted by globalization and it’s easy to see how a
About Global Finance 360 detailed, static budget was sufficient to provide value to management.
Global Finance 360 covers the
world of corporate finance and
Unfortunately, while the world changed the annual planning cycle remained relatively
accounting and how these static. Whereas in the past manufacturing facilities and production volumes helped
activities are impacted by determine corporate value, companies today are far more likely to create value through
globalization. Focus areas product innovation, mass customization and agile supply chains. Given the new
include Finance Delivery realities, traditional budgeting suffers from the following issues:
Strategy, Shared Services,
Business Process Outsourcing, The traditional budget takes too long to prepare. It’s not uncommon for a
Process Improvement and budget to require 4 – 5 months and consume a substantial portion of
Organizational Design. executives’ time.
Global Finance 360 is run by The budget is too manual. Many companies prepare and consolidate their
Steve Lynch. Mr. Lynch is a annual budget in Excel. This increases the time necessary to develop the
Principal in the Finance budget and exposes the budgeting process to human error as spreadsheets
Transformation practice of a are manually combined to reflect organizational roll-ups.
global consulting company. He
is responsible for the marketing, The level of detail is too great. Many companies make the mistake of
sales and delivery of Finance building too much detail into the budget. This creates far more complexity than
Transformation services in North is necessary. Instead of facilitating the budget process, it actually becomes a
America and serves as a key hindrance to the creation and monitoring of the budget.
liaison for his company’s global
Finance practice. He brings The number of iterations is too high. A typical budget can require 5 - 6
more than 15 years of iterations before the numbers are accepted by senior management. Leading
experience advising global companies focus on minimizing the number of iterations to reduce the time and
companies on their service effort spent on budgeting.
delivery strategies and has
served over 60 clients in a Budgets are internally focused. Most of the numbers in the budget are
variety of industries including based on previous years’ data. All too rarely is a budget based on existing and
consumer products and anticipated economic factors that drive volume and cost. Few companies
industrial manufacturing, evaluate their proposed revenue and cost structure based on similar
aerospace & defense, companies in the industry. Finally, the budget measures internal metrics such
transportation, technology, as revenue growth, but fails to take into account other levers of value such as
entertainment and financial customer satisfaction.
services. He has also served as
a Controller in private industry Budgets lock in costs through the year. While the budget is thought of as a
and as an auditor in public tool to control costs, all too often costs are locked into the budget for the year.
accounting. Even if economic conditions vary widely from the assumptions upon which the
Mr. Lynch is an active content budget was built, the company’s cost structure resists downward pressure as
contributor on the topics of those costs were budgeted for the year.
Finance Transformation and
globalization and has presented Politics permeates most budgets. The annual budgeting process has
at various forums including the become a high-stakes game of bluffing. Many managers “pad” their budgets
IQPC Shared Services & with extra costs so that they end up with something they envisioned after their
Outsourcing conference. He can budget requests have gone through multiple iterations.
be found on the web at
www.globalfinance360.com. The budget is quickly obsolete. Given that the budgeting process can start
four or more months before the end of the fiscal year, and coupled with a
Contact Information: dynamic business environment, it’s no surprise that many budgets are
obsolete after the first month of the fiscal year.
Steve Lynch
Toll-free: +1.800.216.2512
Building a Better Budget
Office: +1.719.481.2599
1042 W. Baptist Road Given the challenges in the budgeting process, leading companies have moved to a
Suite 194 new budgeting paradigm that emphasizes speed and flexibility. Here are eight ideas to
Colorado Springs, CO 80921 incorporate into the budgeting process:
slynch@globalfinance360.com
www.globalfinance360.com
Global Finance 360 | Copyright 2011 | All Rights Reserved 2

3. About Global Finance 360
Global Finance 360 covers the
world of corporate finance and Establish key linkages between the strategic plan, the Sales &
accounting and how these Operations Plan and the financial budget. The numbers in the financial
activities are impacted by budget should be the culmination of a planning process that begins with the
globalization. Focus areas strategic plan and incorporates demand and supply plans from Operations.
include Finance Delivery
Strategy, Shared Services, Scale down the budget. Reduce the number of line items budgets to focus
Business Process Outsourcing, on the true drivers of revenue and cost. It isn’t necessary or desirable to
Process Improvement and create a highly detailed budget. Focus on key line items that are material and
Organizational Design. that are derived from supporting operational detail.
Global Finance 360 is run by Automate the budget with a dedicated software solution. Reduce reliance
Steve Lynch. Mr. Lynch is a on Excel spreadsheets and manual consolidations. Invest in a dedicated
Principal in the Finance software solution that provides a web-based interface for users, workflow,
Transformation practice of a security and that automatically rolls up budgets at each level of the
global consulting company. He organization. These software packages also facilitate the reporting of actual,
is responsible for the marketing, budget and forecast data.
sales and delivery of Finance
Transformation services in North Employ zero-base budgeting. Don’t use last year’s numbers as a base for
America and serves as a key the upcoming year. It’s too easy for managers to simply resubmit their
liaison for his company’s global numbers without going through the exercise of determining costs based on
Finance practice. He brings estimated activity volume.
more than 15 years of
experience advising global Document budget assumptions (e.g. growth rates, estimated activity
companies on their service volume). Just as footnotes are an integral part of financial statements, the
delivery strategies and has assumptions made to develop a budget are also critical. Assumptions must be
served over 60 clients in a realistic or the budget will lose credibility.
variety of industries including
consumer products and Foster dialogue across functions. The process of budgeting, if done
industrial manufacturing, correctly, can add as much or more value as the budget itself. When
aerospace & defense, departments work together on an integrated budget, they gain a better
transportation, technology, understanding of the challenges facing the overall organization. Strong
entertainment and financial
communication leads to more useful budgets.
services. He has also served as
a Controller in private industry Move compensation goals from a static budget to a series of balanced
and as an auditor in public KPIs. Yes, some will still be financial in nature and a streamlined budget can
accounting. capture those. Revenue, Gross Margin, EBIDTA, Return on Invested Capital
Mr. Lynch is an active content can all be measured against pre-established targets. But managers should
contributor on the topics of also be evaluated on non-financial factors such as product innovation, time-to-
Finance Transformation and market, employee satisfaction, customer retention and customer satisfaction
globalization and has presented ratings.
at various forums including the
IQPC Shared Services & Allocate capital based on a dynamic forecast rather than on a static
Outsourcing conference. He can budget. In most industries business events occur too quickly to depend on a
be found on the web at static budget for capital allocation. Leading companies use their forecast to
www.globalfinance360.com. identify emerging market opportunities and enable them to respond more
quickly to those opportunities.
Contact Information:
Steve Lynch Conclusion
Toll-free: +1.800.216.2512 Budgeting still matters, but to obtain the greatest value from the budgeting process,
Office: +1.719.481.2599 companies need to adjust to the present realities. By following tips outlined above,
companies will produce more meaningful budgets with less effort and cost, freeing up
1042 W. Baptist Road time and management attention to focus on creating value in their businesses.
Suite 194
Colorado Springs, CO 80921
slynch@globalfinance360.com
www.globalfinance360.com
Global Finance 360 | Copyright 2011 | All Rights Reserved 3