Guest Article by Layer
Corporate budgeting is the process used by businesses and organizations to estimate the expenses and revenues generated from the business operations and plan their strategies accordingly. Budgeting is the basis for business growth and success. The business is likely to fail without a proper budget because it becomes hard to determine things like the business priorities, spending areas, and spending caps.
In this post, we’ll discuss why budgeting is important and explore the best practices for an efficient budgeting process.
Why budgeting is important?
Budgeting is crucial for any business for multiple reasons:
- Company’s financial health: In essence, you can consider a budget as a financial roadmap. One of the key purposes of such a financial roadmap is to ensure the company’s financial health and the viability of the business.
- Planning: Budgeting at its core is a planning exercise. Every company has goals, and these goals need to be reflected in a company’s budget. Consequently, they define the priorities, the focus of the company, and the allocation of resources.
- Transparency and accountability: Every budget becomes an essential steering tool for budget owners once it is shared and distributed. However, it is also crucial that budget owners are heavily involved early on in the process. They should take part in the discussions about the goals and ways to achieve them. If you involve budget owners early on in the budgeting process, you’re going to have better alignment on where the company’s headed and better transparency on the company’s priorities, not only by the budget owners but also by their team members.
Collaboration in the budgeting process is very important – it turns a budgeting exercise into an effective and valuable process. Now, let’s take a look at some of the best practices for preparing for budgeting.
Budgeting Best Practices
1. Be clear about company goals
You want to make sure that you’re super clear about the company’s goals. As mentioned before, a budget is a financial roadmap. If you don’t know the company’s goals, and if you don’t know where the company’s headed, you won’t be in a position to define your roadmap. So any budget is going to be meaningless.
2. Understand the business
You don’t only need to understand the company’s goals. It’s also important to know how the business truly works. On a high level, a company should be able to answer the following questions:
- How does the company make money?
- What is needed for that?
Or be more specific:
- What would the total number of users look like by the end of 2022 if we increase marketing spend by $20K in June?
- How are the feature improvements A and B going to impact the conversion rates and retention rates?
Thus, in order to prepare and manage a budget, a CFO or a Financial Analyst should have an excellent understanding of the business processes. This will sufficiently contribute to the development of a sophisticated budget model and will help you define the key stakeholders.
3. Involve all relevant stakeholders
Make sure you involve the relevant stakeholders. Suppose you are the CFO, the VP of Finance, Head of Finance, or whoever you may be in charge of setting up the model and managing the budgeting process. It does not necessarily mean that you are a person with all the relevant know-how in all areas, but you have to involve each area’s expert to the budgeting process. Make sure you leverage the know-how and available information.
Information is typically scattered across an organization among different departments and various stakeholders. So involving them will pay off in the form of better alignment, more substantial commitment and motivation in the long term.
4. Define the output in advance
You want to think about the outputs of the model and its structure in advance. Before you open an Excel file, a Google Sheet, or whichever planning tool you may be using, think about what kind of output you would expect and what the fundamental purpose of your financial model will be.
Then, define how the structure of the model would look like and make a very conscious decision about the level of detail you want to go into. Many Finance managers early in their careers tend to optimize the accuracy of their models by adding additional layers of details and drivers, but very often, doing so does not lead to improved accuracy. Instead, it results in higher complexity, and not only will take much more time to develop but also to maintain it in the future.
5. Plan ahead
Lastly, you want to make sure that you plan ahead. Plan in advance that you will have discussions with individual budget owners, who might be interested in customization and multiple edits. Moreover, big companies tend to have complex structures resulting in multiple interdependencies between individual budget owners.
So there’s also a need for alignment between individual budget owners and departments. Account for that in advance!
Planning and budgeting takes time. Ideally, you don’t only have a once-a-year budgeting process, which takes tons of resources, but rather develop it as an ongoing process. This way, you ensure that only minimum input is required for the updates on the assumptions throughout the year.
Therefore, you can lessen the effort it takes to support the budgeting process for all stakeholders.
What can I do next?
You can watch Layer’s Lunch & Learn webinar recording on budgeting automation and best practices to see how you can actually put theory into practice.
What is Layer?
Layer is a spreadsheet platform that works on top of Excel and Google Sheets. It allows you to easily manage and automate spreadsheet workflows. With Layer, you can:
- Upload or connect your existing Excel or Google Sheets-based budget.
- Share different sheets or even cell ranges of your spreadsheet with various stakeholders or departments involved in the budgeting process.
- Automate your communication flows and keep track of your data submissions, contributors, and deadlines.
- Review every single change made and decide which ones to merge with your spreadsheet or discard.
- Eliminate errors in your budget or manually copying and pasting data across files.