A happier annual budgeting process

When I had more junior finance roles in larger organisations, I often found the annual budgeting process to be somewhere between traumatic and soul-destroying. Week after week of meetings and emails and multiple versions of clunky spreadsheets.

So when I became a Finance Director, I thought long and hard about what made organisational budgeting so awful. I then identified four key components of a happier budgeting process;

• alignment
• training
• tools
• trust

This post explores these further.

I should also add that I don’t think one annual budgeting process is optimal in most organisations. I much prefer a rolling forecast approach. However, the principles in this post apply however (in)frequently you carry out a budgeting or forecasting exercise.

Alignment

An organisation’s budget should align with its strategy, and there should be a common understanding of the aim of the budget from the board down to budget manager level.

This needs to be thrashed out at the start before you begin any budgeting conversations. What does the organisation’s budget need to look like and why? If you’re a not-for-profit organisation, why are you trying to set a surplus budget? Should delivering the surplus take priority over delivering your charitable objectives?

I always try to have a workshop with all budget managers prior to the budget that explains what the board want to achieve, and where this currently sits in relation to previous budgets and current spending.

Train budget holders

Most people never receive any formal training in budget setting or budget management. It’s just something that they’re expected to learn by osmosis once they get to a certain level of management.

And while the principles of budget setting seem simple (work out what you want to do and how much it’s going to cost), the language used to describe aspects of it vary from organisation to organisation. I have seen people use “actuals” where I would say “forecast”, for example, which caused huge confusion. I have also seen at least three different definitions of “on-costs”.

Therefore, when I have a session with budget managers to explain the aims and context of this year’s budget, I also explain the organisation’s planning and forecasting cycle. I provide guidance about budget terminology, and I also explain any tools that I want them to use. I tell them that members of the finance team will be there to support them all the way.

It’s also helpful to share my accuracy threshold. In a £10m budget, I’m unlikely to care if a budget holder is £300 overspent at year end. However, budget holders can and do worry about this level of detail unless you give them permission not to.

Use the right tools

In a large organisation, you might have access to specialist budgeting tools. These can take the work out of an annual budgeting process, for example by allowing you to manipulate current data or try out some different scenarios. That’s the theory anyway.

In most places, Excel remains king for the annual budgeting process. However, there is Excel and there is Excel. Finance teams often design budget templates to make the consolidation of budgets easier for them, rather than to make preparation easier for budget managers.

It’s entirely possible to achieve both ends with the same template, but it takes a bit more planning and Excel knowledge. For example, if you learn some basic Power Query, you will be able to amalgamate budget templates much more easily, even if they’re in unusual formats, so you have more scope to make the templates understandable for budget holders to complete.

You should also aim to standardise any calculations that you can and use central assumptions if possible.

For example, you should have headcount calculations in the budget holder template, linked to an overall pay structure. Budget holders can see the impact of changing headcount assumptions, and finance can quickly amend multiple budgets for bulk changes to salary, eg National Insurance rates changing, or annual pay increases.

If this sounds like a lot of work for finance, that’s as it should be. It’s much more efficient for finance to do this in bulk for everyone than every individual budget holder attempt their own version. Finance should be doing the legwork upfront, so that budget holders can translate their thinking into a budget as quickly and easily as possible. However, if you design everything well, you can use it again and again in the future.

Trust is a must

Many organisations are trapped in what I call “the vicious budgeting circle”. Budgeting takes a long time and is fraught because there is a lack of trust between budget holders and finance, or between junior staff and senior staff. Budget holders prepare budgets with lots of contingencies, because they think that finance or their managers will cut their budgets. This results in over-estimation across the organisation, so the management team have to tell everyone to cut their budgets. All of this drags out over months, with trust and goodwill eroding at every stage.

In order to break this, budget holders need to trust that finance is there to support them. And finance need to trust that budget holders know best how to translate the organisation’s goals into budgets.

How do you establish that mutual trust? Having clear alignment across the organisation about budgeting goals is part of this. Another key factor is finance and the senior management team dealing with overspends in a supportive rather than penalising way. If you want budget holders not to pad their budgets, they need to trust that finance and/or their manager has got their backs if they do overspend. Finally, you need to ensure that your appraisal system rewards budget managers for accuracy and honesty throughout the year.