The annual budget: how to make it a tool for managerial action?

Budgetary cycle: a cumbersome process, but still essential

Like every year, the summer marks the start of the budgetary cycle in companies.
For the 25 years that Romain Dubuisson, Founder of BAKIA, has been working in the Finance function, he has heard the same criticisms of the budget cycle. . However, this cycle still persists in almost all companies.

Drawing up a budget is often perceived as a bureaucratic and cumbersome process, the added value of which is not perceived. This exercise mobilises the energy of the company, sometimes for several months, requiring a lot of work for each department, involving a large number of employees, and which is no longer valid as soon as it is validated.

However, the budget has an essential coordination and alignment function between the major departments of the organisation, starting with the commercial and operations functions. It allows all parts of the company to define a common vision for the coming year and to ensure that the ends are consistent with the means.

A well-executed budget is also a powerful management tool, with each manager committing to objectives that will serve as a pivot in the dialogue with his or her superiors and teams.

How to improve and simplify the budget cycle in a company to make it more effective?

There are several simple actions that can be taken to simplify the process and increase employee involvement.

  • Simplify budget modelling: this involves rethinking the budgetary framework and the associated management rules, particularly the level of detail on which to build the budget. For example, should we define a budget at the “employee”, SKU or homogeneous product group level? It is possible to produce a less detailed, more macro budget and therefore save time for the teams without losing budgetary relevance. As the saying goes, “It is sometimes better to be globally right than precisely wrong”. However, the model must take into account the performance indicators on which management will be able to set improvement targets, even if they are generally not the most refined.
  • Optimising the budget process: mapping the stages and tasks of the budget process in detail can identify pockets of productivity that are unsuspected or too vaguely understood. In fact, as a result of handovers carried out too quickly or misunderstandings about the process as a whole, many tasks could be eliminated, simplified, carried out more quickly or automated.
  • Set up a pre-budget : the pre-budget is a very simplified first iteration of the budgetary process which enables top management to agree on the major objectives, the action plans to achieve them and the resources to be provided to achieve them, as well as the expected financial orders of magnitude. It would therefore help entities avoid starting from assumptions that would then be rejected when the budget is submitted. It should be noted that, in a complete corporate planning process, this is the role that the Medium Term Plan should play.

These actions to improve the budgeting process are often accompanied by a change in the costing model or even the tool used to implement this model:

  • Changing the costing model: budget modelling must correspond to the management and costing models used by the company: Direct Costing, Full Costing, ABC/ABM to name the most commonly used. It may be appropriate to revisit the existing model, which is often firmly rooted in the company’s culture, to check its suitability for management needs, to develop it or to change it radically. The Activity Based Management approach, for example, is a very relevant way of combining operational productivity management and financial management.
  • Changing tools: this can also bring added value by providing the Finance function with certain innovations that can make the budget process more fluid, such as collaborative workflows, data hubs, self-service reporting, data visualisation or even calculations based on Artificial Intelligence. A change of tool is also an opportunity to re-mobilise employees around a unifying project and to attract new talent.

What if we stopped making budgets? The principle of “beyond budgeting”

This is the strategy that some large companies have decided to put in place. Putting an end to the annual budget cycle and concentrating on rolling 12-month forecasts. Already experimented with varying degrees of success by major French groups, the concept is attracting renewed interest in the current context of change and uncertainty post-COVID.

Beyond budgeting is a method developed in the 1990s which, in addition to increasing the frequency of forecasts, includes non-financial objectives and decentralises resource allocation decision-making. The aim is to reduce the time and cost of the forecasting process, to make the organisation more flexible and responsive to change, and to spread a culture of accountability for the use of resources.

While this approach seems attractive, it has the disadvantage of neglecting the analysis of operational performance deviations from the initial budget and the resulting action plans in favour of more frequent re-forecasting of results. As such, it is more of a “finance” than an “operational management” tool. It is also a complex process to implement and maintain over time. Beyond budgeting requires a corporate culture that is particularly open to change and decentralisation and is therefore not suitable for all organisations.
It is nevertheless a method to be followed and one which will probably be part of the future of the Finance function, provided that it can be linked to “operational management”.

Assisting companies to develop their budget cycle is one of the services that BAKIA offers. With a 360º vision, our consultants and independent experts, in particular Jean-Louis Leignel, an expert in performance management and strategic planning, co-construct and implement adapted solutions with each client. The objective remains the same: to enable the budget exercise to become a relevant management tool, bringing real added value to the management of the financial performance of each company.

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