Budgeting – Why do companies do it?

Before jumping into the best practices, it is important to understand why companies do the budgeting exercise – either yearly or on a more frequent basis. Is it just to complete one more activity that needs to be done every year. Definitely not, but budgeting process allows the entire organization to come together and focus on the goals they want to achieve, draw action plan to achieve the goals and detail the same in financial terms. This helps them to walk out with what the next year looks like for them. It also facilitate in presenting a summary of the same to the various stakeholders depending on the type of the organization – investors, board of directors, top management, employees, customers and prospects on how the business is going to be sustained and grown. Based on the needs, the organization should figure out the methodology of budgeting process i.e. how detailed the process should be carried out, at what frequency, who in the organization should be involved etc. The budgeting best practices and the supporting technologies in the form of CPM products can help in a long way to determine the effective budgeting process. Budgeting Best Practice # 1: Budgeting part of the corporate culture Budgeting should be adopted as part of the corporate culture. It should not be just a chore of top management and finance, but there should be organization wide commitment. This should be an exercise where senior management sets realistic targets and require department managers to produce their own plans and tie incentive compensation to their ability to manage their business and achieve their goals. Availability of effective CPM tools help in the process, as an important ally and overcoming obstacles to adoption of budgeting as part of the corporate culture. Budgeting Best Practice #2: Synchronize the Strategic and Operating Plans. Finance and top management create long range strategic plans that align to goals and major initiatives. Now the budgeting process is where the detailed operating plans are drawn out. Both the strategic and operating plans have to be synchronized and related. The operating plan should not be totally different from Strategic Plan. This ensures that the line manager’s work towards the same goal optimization set out by the top management. Ideally the operating plan should flow from the strategic plans. CPM solutions from SAP offers modeling capabilities that can ensure a clear alignment of the strategy defined in the SAP Strategy Management, and from there moving to Planning in SAP Business Planning, thereby ensuring synchronization between strategic and operating plans. Budgeting Best Practices # 3: Both Bottom up and Top down Many organizations do one of the two approaches. Some organizations plan completely top down, where the top management provides all the goals and targets of what needs to be achieved. The outcome of that is a detailed budget just driven by those top goals. But this could be very unrealistic, since the business unit managers may not be able to commit to this. Few other organizations do the pure bottoms up approach where the whole organization does a detailed budget, flowing through the bottom up chain of command, and this again may not achieve the management goals satisfactorily. So the best practice approach would be to have budgeting done with both scenarios and finally the bottom up plan goes and meets the top down (target) plan, marrying them together. Now this could lead to lot of disagreement within the organization due to constraints on time and effort for doing both approaches. This is where SAP Business Planning can enable and fasten the whole process of multi scenario budgeting. With capabilities to reconcile two different categories of budget, organization can concentrate more on the planning and strategic aspects, rather than on the manual reconciliation and co-ordination. Since the whole solutions are empowered for the business user, it provides lot of flexibility to model different planning model, easily and flexibly. Budgeting Best Practices # 4: Relative vs. time trend budgets This is a very important best practice in the current competitive and environment. Lot of effort is spent in creating budgets that are what I call ‘time trend’ budgets. These are just numbers fixed in the budget based on a certain %age growth over the previous year. But by doing this the opportunities that exist beyond the current framework of the business are not leveraged. The best practice approach would be to start the entire process from a relative perspective, with respect to the industry and market benchmarks. If it is revenue planning, there should be comparisons of what the market size is

The vision of SAP CPM offerings is to promote the business manager from a mere transaction manager to being a strategic advisor. the companies may benchmark against industry metrics to achieve the best results. and this in turn will lead to cash flows and funding plans. In the bottoms up plan approach each regional sales manager can contribute to how much of the market share his/her region can derive and what are the new opportunities that exists that the competitors have explored or yet to explore. Sales planning created by the Regional Sales department should seed the production capacity planning of Operations Manufacturing department. rather than doing the budgeting as a financial centric activity that is usually completed as a transactional task. Also the predictive analytics capabilities in SAP CPM offer analysis of data based on their relationships. to run the business operation. Budgeting Best Practice # 5: Collaborative Planning Similar to carrying out a real time activity. In the top down plan. in order to drive the company to excellence. The below chart explain the collaborative planning: " SAP Business Planning product allows for very effective collaborative planning through the concept of Business Process flow. Budgeting should also be collaborative across the various functional departments. If it is supply chain planning. When an organization spends time in putting up a collaborative budget in their planning cycle. the top management may identify the strategies to grow the business. The users can approach the product from a process centric approach rather than a function centric . where every department co-ordinates with each other seamlessly. This best practice promotes business or entrepreneurial thinking to every manager. The shortfall in capacity should lead to investment and capital expenditure planning that would be prepared by Projects department.and the growth opportunities for the market. The whole process should be iterative and co-ordinate through a seamless flow. results are bound to be very effective since all departments have converged into an integrated plan for the next year. There would be parallel streams to recruit new people that will lead to Workforce Planning by Human Resources department. and also to prepare marketing planning. The plan should not be just to beat the last year internal metrics but to look at the industry benchmarks metrics. Predictive analytics can be leveraged to plan for sales volumes based on GDP/ income levels/ purchasing power of the market segment or another example would be ascertain the maintenance cost based on the available oil prices.

the driver based model would consider the drivers such as Sales volumes. Also as the solution is business user owned and managed. merits and overall company revenue to determine some bonus element. This will also ensure identifying new opportunities for business that did not exist when the original budget got prepared. The LOB managers set the values for the business drivers in a budgeting process. Salary rates. the models are created with assumptions that the top management or the LOB managers perceive to achieve the goals. adaptable and continuous planning. maintenance cost per vehicle. This will facilitate to incorporate the impact of the events. Budgeting Best Practice # 7: Driver based planning The planning exercise is all about assumptions. Another driver based model would be to determine the workforce cost. Budgeting time should be spent to model on very high impact items such as revenue. In addition the insight module within the solution allows for automated variance analysis that helps in identifying the events that is causing the variance. Again through this approach. based on which the complete budget is determined. Budgeting Best Practice # 6: Adaptable and continuous planning Every plan becomes successful only when it is flexible to change based on the internal and external events. It is truly enabled for the business user. the freight cost would change. the model is developed comprehensively based on the way the company runs the business. market and operational data that is loaded into the database that may reflect the dependant events. So from a best practice standpoint. Drivers are nothing but the pillars based on which assumptions are determined. To support such an event based. flexible and easy to use administration interface to build the driver based models. Examples for driver based planning are the following: To determine the outbound freight cost. except that it may be captured as a total figure. The drivers for the workforce cost would be built based on the Headcount FTE (full time equivalent). The cost would be built based on these drivers and as the driver values changes. The entire annual budgeting process is modeled as a business process flow and the different departments can collaborate and create multiple iterations of budgets. As the exercise is futuristic. it is very important to build a template or planning model that sits on top of all the drivers. SAP Business Planning solutions with its very flexible. and it is designed as a driver based planning model. So the advantage of this approach is not to recalculate the cost manually when there is an increase in fuel cost or change in the sales volumes forecasted. Annual budget needs to constantly reviewed and forecast created at least every quarter if not at a shorter frequency.approach. Budgeting Best Practice #8: Budget Material content only Maximum budgeting time should be spent on areas that would have significant impact from a revenue. SAP Business Planning offers powerful driver based planning capabilities. It would not be prudent to invest time to detail out an expense line item that is just 0. especially in this fast changing business environment. in order to implement business plan change rapidly. Also the more important consideration is that the solutions should be business user enabled. to ensure lot of time is not spent on modeling these expenses comprehensively in the planning models.001% of the revenue. This is achieved through existing transactional. SAP Business Planning solutions offer the concept of line item detail functionality which allows for free form detailing of certain low value expenses. it is very essential to have software solutions that can support the change. Best practices recommend rolling forecasts coupled with annual planning. The solution offers predefined driver based models for revenue. This will also allow opportunities to build strategies to control cost or enhance revenue. headcount and capital expenditure planning. it allows powerful. to ensure the business plans reflect the latest scenarios. the main expense that contributes to say > 10% of the overall cost. Budgeting Best Practice # 9: Timely and accurate . fuel cost. and efficiency of transportation volumes per vehicle. The advantage of such an approach would be to make sure the budget is supported by the strong drivers that are essential for a particular business. cost or profits. expense. easy to use administration capabilities fits this need very well.

. Also through the Business Process Flow tracking capabilities.This is a no brainer. It is not a good practice to start budgeting for the year after the year starts. SAP is greatly focusing on this area with multiple CPM offerings to enable best practices in budgeting and reporting. The accuracy is another aspect. Especially for the higher impact elements. it is important that the numbers are accurate. This is an important consideration where using spreadsheets could be a misery and SAP CPM solutions would help. This allows for a well laid out business plan for the following year. Of course this budget needs to be revisited continuously and should allow for modifications. It is time now to go implement these best practices at your end in whatever form using SAP Business Planning offerings. Since it is business user owned and managed. the model is built by the business users who know how the calculations should work or how the data should be used. SAP Business Planning solution is the best suited tools to ensure timely and accurate budgeting are carried out. When building a driver based model. the calculations that results from the drivers should be accurately modeled to get the right results. budgeting exercise should be carried out in a specific timeframe to ensure it is relevant. the budget coordinators can ensure that the budgets are prepared in time. As in every process. Many companies ensure the budgeting for the next calendar year is completed in the November timeframe of the previous year. I hope you benefited by reading the above budgeting best practices.

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