Budgeting best practice step 1 summary:

• Senior leadership establishes top-down targets
• Roundtable budget discussions are conducted to evaluate assumptions
• Consensus on high level targets is achieved before releasing to business units.

The conventional way: Off to a rocky start

Senior leadership frequently kicks off the budgeting process by conducting a week of roundtable discussions aimed at formulating high-level budget objectives for the upcoming financial year. Although lengthy reports may be available, the senior leadership team tends to work primarily from a slide deck of spreadsheet screenshots, prepared for them by a designated working group. The deck contains historical results along with some basic and static growth assumptions and is often carefully edited so as not to prompt unwanted scrutiny.

Prolonged sessions of budgeting hypothesising follow, using only rudimentary assumptions, supplemented by ad hoc, manual, offline calculations based on more static screenshots. “What-if” scenarios can be only superficially evaluated because the impact of those scenarios to the business unit or departmental level cannot be accurately mapped.

Many of the discussions that take place during this week are “political,” where potential conflicts among various interests take over as the main topic of discussion. That is not always a bad thing, and may even be necessary, as an executive’s duty is to resolve competing interests so that operational-level activities align with top-level corporate strategy. Even so, these discussions are often protracted and disconnected from the current operational reality because the data is out of date and based on simplistic assumptions. A week of roundtable meetings can easily extend into two to three weeks before senior leaders reach the point where they can share a high-level budget with divisional leaders.

The best practice way of budget and target setting: course of action

1. Start by being clear about the purpose. Senior leadership initiates the annual budgeting process with the explicit purpose of setting high- level, top-down targets for group and business units and aligning those targets to top-level strategic goals. Taking last year’s actual performance as a baseline, the main purpose is to establish a forward-looking perspective, and get buy-in and accountability from lower levels of the organisation.

2. Conduct roundtable budget discussions. These discussions take place during the first week and should not be based solely on information that has been prepared and presented in a summary slide deck. A primary purpose of these roundtable budget discussions is to set out and test discussion points. A slide deck can be used to frame parts of the discussion that lead to this objective, but it is not the primary source by which to guide roundtable discussions.

3. Use a Connected Planning solution as the foundation of the discussions. The discussions should focus on getting agreement about the facts, assumptions, and the targets that are being set, with the aim of being able to communicate all of these succinctly to leaders at the lower levels of the organisation. The roundtable discussions may be informed by findings that appear in a static deck but are not directed or excessively influenced by those findings.

4. Investigate, don’t speculate. Use discussion points and issues raised to evaluate different assumptions and immediately assess the financial impact. “What-if” scenarios can be run in real time across individual business units or at a group level, and financial implications can be instantly calculated and evaluated further.

5. Seek a balance of rigour and relevance. The senior leadership budget decision-making process is much more rigorous and incisive, and greatly accelerated, when not working off static spreadsheets.

6. Aim to compress activities and curtail digressive conversations. Activities that previously took two or three weeks often take just two or three days when using a Connected Planning solution.

7. End the week by achieving a consensus. Senior management should conclude the week with a unified message with the intent to immediately begin socialising the high-level plan with divisional leaders.

For more information, download our budgeting best practice guide.

Our next blog will explore circulating top-down budget targets among business unit leaders. Follow us on our social channels for the next step in the budgeting best practice series.