Right about now, most financial teams are in the thick of budgeting season. It’s a time when you must do the impossible: Develop a budget for the next 12 months, in the face of constant flux and uncertainty in the market. Ed Gromann, CPO at Centage Corporation, talks to Total Business about why budgeting shouldn’t be a seasonal operation.
We all know the drill. Finance will collaborate with other functional heads, trading spreadsheets with bits of data that represent goals, strategies and risks anticipated in the coming year. Far too often, once all of these spreadsheets are collected and consolidated, the budget will sit static for a quarter, when it’s time to assess how well the company is tracking to plan.
There’s an opportunity missed here. The input you’ll receive is more than a budget. It’s a plan of action that memorializes the kinds of customers you want to add to your rolls and the new markets and product niches you wish to enter, along with all of the investments you’ll need in order to achieve those goals. Budgeting is also a time to assess your company’s strategy for adding more value to your existing customer base and determine if you should implement new technologies to lower costs and drive operating efficiencies. In short, creating your budget is one of the company’s most strategic exercises you’ll do all year. Shouldn’t you also use it to determine if the strategies you set forth should be expanded or abandoned based on real-time results?
It’s fair to say that there is no other document that reflects your company’s goals and strategies for the coming year and beyond. An organization’s budget is the foundation for all the planning and decisions you’ll need to make, which is why it should be something you look at and update, if not weekly, then at least monthly.
Many CFOs I speak with have a limited view of their budget’s usefulness. To them, it’s a way to see how well they’re tracking to plan. To be sure, variances are a crucial barometer (I personally believe they should be tracked every week). But variances occur for a reason, and it’s not enough to merely note their existence. You need to dig into each and ask critical questions, such as: are you meeting expectations? If not, which sales region or customer sector is falling short? How well did you assess the resources you needed to deliver on the plan? Conversely, is an area of the budget performing better than expected? If so, how can you pivot to exploit it further?
A CFO once told me that he looks at his variances often because, “it gives me more opportunities to make better decisions for my company.” That pretty much sums up the benefits of viewing your budget as an active, living document to guide your business. If you monitor your plan periodically, and seek data to understand when variances, positive or negative, occur, you can take data-driven steps to course correct.