Next Year’s Budget Planning – 5 Strategic Considerations

At this time of year, companies from all sectors and of all sizes are preparing to tackle their annual budget planning process.

The budget planning process — the yearly exercise where business units submit their numbers to the CFO to establish next year’s budget – has become a routine function within many organizations. The process is a valuable exercise for:

  • Controlling your finances
  • Ensuring you can continue funding your current commitment
  • Enabling you to make confident decisions to meet your objectives
  • Ensuring you have enough money for future projects.

But there is more.

Budget Planning is a Strategic Opportunity

For nimble and forward-looking organizations, budget planning is more than just a routine numbers exercise.

Budget planning is a strategic opportunity. It’s a chance to step above the day-to-day craziness, review your performance, and use those insights to make necessary change and inform future decisions.

The budget planning process produces a roadmap to take control of your organization moving toward your goals.

Benefits of a Budget Planning Process

There are some key benefits you should be drawing out to inform your ongoing business strategy. For instance, the budget process offers you:

  • A chance to review your performance factors
  • A greater ability to anticipate problems
  • Sound financial information on which to make decisions
  • Improved clarity and focus
  • Greater confidence in your decision-making

There are some important insights that will contribute to your long-term goals.

Typical Steps to Budget Process

The typical budget process looks at past performance, current circumstances and future potential.

Looking Back

  1. Review performance
  2. Analyze successes and failures

Account for the Present

3. Conduct a “SWOT” analysis to determine Strengths, Weaknesses, Opportunities and Threats

4. Look at your key objectives for the coming year and change or re-establish your longer term planning

Look Ahead

5. Define the new financial year’s profit and loss statement

6. Conclude the plan

7. Conduct a regular review

Each of these steps has strategic value for your business planning.

Strategic Considerations

From our experience, we have identified five key things that elevate a budget planning process from an accounting exercise to a true strategic function.

1.    Make time for budget planning

We mentioned above that budget planning is an opportunity to rise above your day-to-day activities.

Make it a priority to step off that treadmill and take an outsider’s perspective on your business. You will be amazed at the opportunity to embrace opportunities and tackle the problems you see.

However, you must make it a priority by scheduling time to do it. Otherwise, your day-to-day activities will simply consume you, and the planning will never get done.

 2.    Involve the right people

In too many organizations, the budget planning process happens solely within the Finance Department or the CFO’s office. While the final decision is ultimately approved by the company president, the reality is that different people throughout your organization can enhance and inform the process.

What about the sales force? Or the business analysts?

What are their projections for future growth? Their views will make your budget projections more accurate, as well as increasing commitment to making it a success.

3.    Historical information is valuable for measuring growth

It’s about benchmarking. Your annual performance provides the baseline by which to assess your year-over-year performance.

When you are looking to the future, be realistic. Remember that the environment around you changes and can affect where you put your resources and attention.

4. Consider the variable costs of growth

Fixed costs such as rent, leased equipment and furniture are largely constant. Variable costs include salaries, communications and advertising and fluctuate as your business grows.

You should project growth, but don’t forget to include the variable costs of handling that additional business. Use your past performance to calculate the relationship between growth and variable costs, then use this data to project variable costs of future growth.

5. Be Continuous

Budget planning is not a one-time exercise. It’s an ongoing, responsive, flexible process.

Don’t just file the budget and return to your day-to-day routine. The process of examining performance, assessing your status and planning for the future – keep it going. As a leader, business planning and allocating resources should be on your mind constantly.

Remember– the road is long. Always keep a long-term perspective.

Your Turn

What is the budget planning process in your organization?

Is it a strategic priority, or an afterthought?