For those of you that don’t know me, I have been working as a financial analyst for the past year. I am working at a $250 million fitness equipment manufacturer, and as part of my job I am responsible for creating a massive budget that is used to hold all departments accountable for their spending and revenue goals. While I won’t go into all the details, there are steps that we take to get the end result – a completed business budget.
The business budgeting process begins several months before the budget needs to be finalized. That’s because it takes a lot of time to get each manager to give their feedback on the budget. After all, their top goals aren’t budgeting and they often see it as more of a nuisance. Also, there is a lot of time spent doing multiple reiterations of the budget that are also very time consuming. In the end, you need to get both top management and every last employee to buy into the numbers if you want it to work.
We start the budgeting process by getting the sales and expense forecasts from each department manager. This takes a couple of weeks. The best way to get managers to comply is to give them an easy to understand template that you can easily incorporate into your final budget template. Of course you should offer to sit down with anyone that wants your help or requires any explanations of how to forecast or budget. Also, you should give guidelines for them to follow. In my case, I give them last year’s numbers and some guidance as to how they should approach this year. For example, you may be experiencing a slowdown in sales and you need managers to reduce costs year over year. Or maybe, you have lots of growth in the forecast so you want to stress the items needed to reach that growth. Whatever the end goal of your budget, you should give as much guidance to the managers as you can.
Of course there are two sides to a budget. The business budget that management wants, which always includes higher sales and higher profitability. And then there’s the budget the sales department wants, which has sales that they can exceed (higher commissions) and much higher spending than the year before. That brings us to the next part of the budget process. Gathering the information and finding middle ground. As a budget analyst, you need to try to bridge the gap between all involved parties. That means finding out the final requirements of executive management and using negotiation and a higher starting point to get both sides to agree.
After you’ve gotten all the information you need its time to build the budget model to include everything and summarize the overall budget. Many companies do this in Excel. Our company uses a hosted software solution known as Adaptive Planning. In the Adaptive Planning Budget Software, each revenue and expense line item is entered once. It is entered directly into the cost center or profit center that it occurs. Profit and cost centers are typically the same as departments. For example, there is a profit center for sales (they have profit) and there is a cost center for Finance and HR (they have only costs). Profit centers also have cost centers assigned to them, but for the most part I hope you can get the idea.
In our budgeting program, we can save multiple versions of the budget and it will automatically summarize and report the data as it is changed real time. In Excel, you would have to just save different versions and create the summary pages that you desire.
The next step is to have the executive management team review the budget. They will provide feedback as to where you need to increase, decrease, align, improve or reduce something, and you can then circle back to the manager of that area and further negotiate the required changes.
When this process is done, the business budget you’ve just completed can be finalized and then used to track all of your business metrics such as revenue goals, expenses, shipping rates, etc. – that is until the next budget is due. Hopefully you only have to do your business’s budget once a year.