Annual budgeting is often a dreaded process, even for many finance professionals who are experts at creating them. But the idea that budgeting has to be a chore can be harmful to the potential growth of your business.
Budgets are more than just a way to track and plan your spending for the year—they’re an opportunity to debrief on the previous year, align finances with a larger strategy, refine goals, have strategic discussions, and align leaders across your organization.
In this blog, we’ll walk through 6 key annual budgeting best practices that help you do all of the above and more.
- Annual corporate budgeting processes should be collaborative, strategy-driven, and data-informed. Budget teams should include representation from all business units.
- It’s critical for budgets to be strongly aligned with larger organizational objectives.
- The annual budgeting process is best executed using a centralized planning software tool with AI-powered predictive analytics capabilities.
What’s the Real Purpose of Annual Budgeting?
By its simplest definition, annual budgeting is a financial planning process that ensures an organization has the monetary resources it needs for the coming year. In practice, however, it’s undergoing a bit of an evolution.
Much like the IT assets and infrastructure that are now such a huge part of every business budget, the annual budgeting process is shifting from an operational support project to a strategy-driving activity.
Thanks largely to the emergence of big data and AI-powered predictive analytics, budgeting and forecasting can now be done with more insight than ever before. Real-time insights and reporting give finance teams a clear view of how funds are allocated, ROI of specific line items, and ways to alter the budget so it’s better aligned with organizational goals.
At the same time, data analytics platforms have democratized data across organizations, making it accessible and usable to everyone—budgeting information included. This means annual budgeting isn’t a closed-door affair for the finance team anymore.
The best corporate budgets in 2023 are data-informed, collaboratively built, and aligned in transparent ways with the larger strategy and goals of the business.
6 Annual Budget Best Practices for Your Business
Set and Know Your Goals
Goals might seem like a given, but in the real business world, they’re often not prioritized. A study done a few years ago by The Economist found that a staggering 90% of C-level leaders from large companies say they failed to reach all of their strategic goals, due largely to inadequate implementation and delivery capabilities.
Budget and financial resources, of course, play a large role in how well an organization can actually execute its plans and achieve its objectives.
The first budgeting best practice to remember is starting with goals. If they’ve already been set, great—learn them and share them with your budgeting team. If your goals are unclear, it’s time to revisit our second budgeting best practice: Start at the top.
Start at the Top
Annual budget priorities start with leadership. While many executives don’t want to get in the weeds with line-by-line budgeting, they’re responsible for setting strategic direction and developing goals and objectives for the coming year.
Before you begin to build your budget, make sure your C-suite has a clear vision of the next year’s priorities, and that you understand how they should be incorporated into the budget.
Build a Representative Budget Team
The budget encompasses your entire business and thus should include representatives from each business unit. Having a representative team means you take the guesswork out of budget planning and make decisions based on firsthand perspectives. Further, when there is (inevitable) debate about parts of the budget, those who are directly involved can make their case.
This team-based model may take some adjusting, especially if you’ve been operating with a traditional hierarchical decision-making structure as it relates to budget. But the payoff is undeniable—Deloitte found that 53% of companies experienced significant improvement in performance after implementing the team-based approach.
Review Your Past Budget
Your past budgets are a huge learning opportunity, and it’s an annual budget best practice to review the previous year’s budget to compare budget numbers vs. actuals. Be sure your team goes into this step with a non-judgemental mindset—while accountability is key, this is more about using what happened in the past to inform the future.
For example: Perhaps you budgeted way too high for a usage-based software subscription. Actual usage is way under, and you only spent about half of what you anticipated. Did you simply predict wrong or is there another issue that needs to be resolved so employees use the tool more often?
On the flip side, there may be places where you went way over budget and need to know why. All of this analysis—which should be a collaborative team activity—is aimed at gaining insight that will help you plan smarter for the year ahead.
Choose the Right Budget Method
There’s plenty of debate about which budgeting method is the best, but the reality is what it is for most business preferences: Different approaches work better for different companies. The key is not to choose any one method, but to know the one that’s best for your business and use it consistently.
Top down vs. bottom up are, of course, the two main approaches to annual budgeting, but new methods such as zero-based budgeting are also gaining popularity. Many factors play a role in which is right for your organization—company size, maturity, leadership style, and the finance skills of individual department leaders (among others).
Your finance team and C-suite leaders should determine the right method and share it with the budgeting team so that everyone is on the same page.
Adopt a Centralized Data Tool
Perhaps the biggest barrier of all to successful budgeting are siloed, manual spreadsheets being used to build a piecemeal budget. To truly execute the team-based, collaborative annual budgeting process we talked about in this article, you need a centralized planning platform that puts your data in one place.
Not only this, it creates a shared, real-time view of your organization and budget. You can build your budget with confidence knowing everyone’s perspectives are based on the same accurate information, and everyone feels valued because they have access to the same insights to inform their decisions.
Leverage Predictive Forecasting
AI-based predictive forecasting models have changed the game for finance teams and their annual budgets. Not only does it improve the accuracy of your forecasting overall, but it makes you more agile and resilient by allowing you to plan for multiple scenarios as well as quickly foresee when outcomes may be different than originally predicted.
Choose a planning tool that leverages AI-powered analytics in its budgeting features so you can stay a step ahead—even amidst uncertainty in the external market.
Transform Your Budgeting Process with Vena
Budgeting is now a central part of strategy planning and organizational agility. To build and maintain a budget that positions your business to grow, you need the right tools in place to make it possible.
Vena’s complete Excel-based Budgeting and Forecasting Software can easily integrate with your source systems, has feature-rich financial forecasting software, and provides a number of Excel-based budgeting templates for planning revenues, operating expenses and more.
Request a demo today to learn how Vena can help you transform your budgeting process.