Budgeting and Planning

If you want to be successful, you need a good plan. Companies usually prepare this plan once a year in the form of a budget. Budgeting, projects and acquisitions need to be planned for the following year, as well as the resources needed. In addition to resource allocation, the planned values also serve to measure performance. Budget planning therefore plays an important role in corporate management and control, however the budgeting process also involves a great deal of hard work.

Budget compilation is a controlling device that attempts to translate the future of the enterprise into figures. The overall budget usually contains several sub-plans, such as turnover, personnel, investments or marketing plans. Planning is done at a company, cost centre, profit centre or product level. The goal of corporate management is to maximise the company’s success by making the best possible use of limited resources. The necessary resources are to be made available to the various divisions and departments. Management usually defines the strategic goals before detailed planning, which serve as orientation for operational planning and resource allocation. The budgeting process itself should be just as resource-efficient and not take too long, to avoid becoming obsolete before it is completed, due to new framework conditions.

Budget planning methods

Over the years, a variety of budgeting methods and procedures have evolved. Traditionally, budgeting is based on the previous year’s budget and adjusted to current sales planning, expected staffing levels and upcoming investments. Too much orientation towards the past and a strongly changing external environment can be counteracted by introducing a rolling forecast process. Zero-base budgeting strives to eliminate the practice of simply updating budgets and proposes to set up and justify the respective budget from zero. However, as this process can be very time-consuming, this method is rarely used for a classic annual budget. If a high level of detail in planning is required by management, the process can quickly become bureaucratic and rigid, requiring a considerable amount of coordination with other departments. Modern budgeting methods try to counteract this. Advanced budgeting, for example, encourages a reduction in the level of detail as well as the stronger integration of strategic goals and non-monetary variables.

The Beyond Budgeting method is also worth a mention, due to its complete departure from thinking in terms of planned and budgeted figures. Beyond Budgeting is based on twelve principles of corporate culture and focuses on relative goals for the planning and management process, such as being better than the competition. In this way, creativity, flexibility and motivation can be promoted in the company. However, implementing this concept requires not only a new approach in the Finance Office, but also a change process in the entire corporate culture.

Budgeting and forecasting

Forecasts are usually prepared during the year. The planning assumptions and figures made in the budget or previous forecasts are expanded with actual values and revised again, and an updated forecast for a certain period – e.g. until the year’s end – is created. Forecasts make it possible to recognise deviations from the plan at an early stage and to take countermeasures if necessary. Many companies carry out forecasts as standard at the end of each quarter, but in the event of significant changes within the business, ad hoc forecasts can also be very helpful to adequately assess the effects of new framework conditions and to be able to react to them.

Budgeting software

Whichever approach to budgeting an enterprise chooses, selecting the appropriate budgeting software is essential. The budgeting software must fit the company’s requirements. The required company structures and planning levels, such as profit and cost centres, must be mappable in the system. The budgeting system must also be able to access data from different source systems and link them. If necessary, it should be possible to deliver the planned figures to downstream systems after the budgeting process is completed.

Budgeting software should be flexible and adaptable to the specific planning needs of the organisation and to different budgeting methods. It should support driver-based planning in addition to zero-based budgeting, top-down approaches and bottom-up budgeting. Comparisons with actual figures and forecasts, as well as reports on deviations from the plan must be easy to create, retrievable at any time and comprehensible.

A database-oriented planning software avoids tedious data consolidation work and errors that can occur when planners work with different figures in various Excel files and “hand-made” tools. In addition to a uniform and consistent database, well-designed budgeting systems also provide complete traceability of the processes, progress and data involved in planning.

The objective of the planning tools being used is to support and accelerate the planning process. On the one hand, the budgeting software must be able to map the required planning logics and automatically carry out the desired data processing, analyses and scenario calculations. On the other hand, the complexity in the conditions should be appropriate for the professional user. Only if the planners recognise an added value in the budgeting software and a good usability is possible, will the budgeting software be accepted and subsequently used optimally.

CSplus recommends CCH Tagetik as a planning and budgeting software package. Tagetik covers all the important functionalities and features of a good budgeting software and can be integrated with other modules such as consolidation and actual reporting on a uniform platform.

Frequently asked questions about budgeting

Rolling forecasts do not predict the development until the end of the year, but are based on a constant period of time as the planning horizon (e.g. six quarters). Accordingly, rolling planning is not so much used to forecast key financial figures for the annual financial statements, but rather focuses on recognising new business developments in order to be able to react to them at an early stage if necessary.

Unfortunately, no general recommendation can be given for the right budgeting method. In order to find the right strategy for a particular company, it is important to consider the company’s culture, size, industry and the complexity of its structure. Traditional budgeting approaches can still work well for some companies. Moreover, planning approaches do not have to be applied in their pure form, as mixed forms can also be used successfully.

The introduction of new budgeting software, like any IT project, requires resources and time. Therefore, it is important to choose a business planning software that is aligned with the needs of the company and can scale up in case of expansion. A good and largely independent overview of suitable software tools is provided by Gartner with its Magic Quadrant tool in the area of Cloud Financial Planning & Analysis Solutions and by BARC (Business Application Research Center), with its studies on planning, analysis and reporting. You will find a collection of the studies on the Wolters Kluwer CCH Tagetik page.
In addition to the points already mentioned in this text, compatibility with the existing IT landscape is also essential when selecting software. If existing systems can be connected and integrated, this makes implementation easier and thus less error-prone and more cost-efficient.