Creating a Corporate Budget You'll (Actually) Stick to This Year
by Medha Patel, on Jan 3, 2019
Like New Year’s Resolutions, corporate budgets are something a finance team is supposed to track throughout the year. All too often (and very much like resolutions), corporate budgets are created and immediately cast aside mere weeks into the calendar year.
Why do companies spend so much time and effort creating a corporate budget that will effectively be forgotten until it’s revisited in a year’s time? It’s a worthwhile question, and if your company is in the business of looking forward, it’s one that needs addressing.
By reexamining the best corporate budget practices, your company’s budget will stand to benefit and work for you in the weeks and months ahead – instead of for a few weeks at the beginning of the year.
Why companies fail to look at their budgets throughout the year
Your budget lacks a good financial model
A budget is the output of your budget forecast financial model and represents your target expenses and revenues for the months, quarters or years ahead, while a financial compiles and analyzes past financial data for future projections.
So, without a solid financial model in place to make an attainable and realistic budget forecast–including, say, expectations that are based off past year’s performance, change in costs, and other market variables–making, and sticking to a corporate budget, is a lost cause from the get-go.
For instance, if you’re on the finance team for a large alcohol and drink company based in the U.S., you may have recently seen cuts to the sin tax–a tax on products like alcohol and tobacco–as a result of the Tax Cuts and Jobs Act signed into action in late 2017.
Though your company accounted for increased sales as a result of alcohol being less expensive for consumers, your budget failed to reflect this projected additional revenue that could have been used, for example, on increased distribution for alcoholic products or an acquisition of a brewery in a region where the sin tax saw the steepest cuts.
Your budget doesn’t have a purpose
Your corporate budget lacking a purpose might stem from a larger issue – does your company have clearly-defined goals and expectations? If those are missing, your budget will fail to provide any value to your company for the upcoming year.
Though traditional budgeting is by-and-far the most-used budgeting technique across middle-market companies, the use of zero-based budgeting–the process of justifying every line item on a balance sheet to appeal to larger goals and expectations, and not relying on past year’s budgeting figures–is growing.
ZBB is undoubtedly an arduous process that takes up a lot more time than traditional budgeting, but it forces employees to justify how expenditures relate back to the company’s goals, a process that created average savings of $280 million for large companies that implemented zero-based budgeting in the past few years.
Traditional budgeting is more time-effective, but zero-based budgeting might be what your company needs to make sure your corporate (and its budget) is in line with its goals and purpose.
You don’t have solid framework to accurately update your budget
If you’re unable to alter your budget throughout the year with reliable and sturdy budgeting tools, you won’t be accurately reforecast your budget for the rest of the year, or conduct budget variance.
Building a variable financial model in a spreadsheet and updating whichever budget management tool your company uses will ensure you’re relying on the best numbers to conduct business.
Creating your budget on an all-inclusive budgeting platform–shared Excel sheets, or a corporate performance management tool, like Quickbooks or Adaptive Insights–will make your budget accessible and easier to alter at points throughout the year.
What to avoid when creating a budget
Avoid: Creating unrealistic/inaccurate targets for your budget
To use the New Year's Resolutions comparison again, we are often overzealous in our personal goals and make such unattainable resolutions that we, eventually, just give up on.
In corporate budgets, we see those same overzealous tendencies and they’re bound to fall flat, a oft-accepted behavior because of a company’s oversight to periodically check in on its corporate budget.
In a similar vein, employees may see the corporate budget as a way to showcase their department’s ability to positively affect the company’s bottom line, and, as a result, may encourage them to create low targets (to showcase them overachieving) and high budgets (to showcase their ability to come in under budget at the end of the year).
Creating unrealistic and inaccurate targets for your budget isn’t just foolish for making your budget work for you – it’s a waste of company time.
Avoid: Creating a budget...and never looking at it again
Review your corporate budget! Whether monthly, quarterly, or semi-annually, there are too many variables in your budget–increased or decreased inventory costs, economic and political events, inter-market rarities–that will affect projections your company made months prior.
In these periodic reviews, stack your projections against your actual figures, and ask your finance team a series of questions:
- Are my company’s assumptions in our initial budget (increased revenue by 6%, client spending increased by 12.5%, etc.) holding true? Why or why not?
- Can large discrepancies and anomalies be explained by other data sets in your budget? If not, why?
- Is my company’s current cash-on-hand in line with projections?
- What alterations do we need to make to our corporate budget that align with our company’s goals?
Creating a budget you’ll (actually) use
Upending the status quo is easier said than done, and creating a variable corporate budget that works for your company won’t be something that happens overnight.
Paro can pair you with fractional financial analysts to provide your company budget forecasting, budget variance, and financial modeling so you can stay on top of what drives your business.