An effective budgeting process adds value by helping businesses determine how much money they have to fund strategic operations, encourages spend effectiveness and challenges processes and procedures across the entire business.
Failing to implement an effective budgeting process has the potential to cause a catastrophic knock-on effect for each and every department across the business. Both in terms of limiting each function’s ability to achieve their objectives but also in terms of ineffective allocation of limited corporate resources.
So why are businesses not already getting the most from the budgeting process?
There is one simple answer here. Habit.
Companies go through the budgeting process annually, and as such, become very accustomed to doing so. Processes become ritualistic, and status quos are perpetuated. There is often no appetite to fix what isn’t broken here and no perceived advantages for doing so.
The advantages of an effective budget process go far beyond numbers. While savings opportunities will of course be highlighted; a good budgeting strategy can also promote efficiencies, encourage innovation, challenge mindsets and create a cohesive vision of success.
So how can these opportunities be harnessed? I’ve suggested five key considerations below to help business leaders maximise the effectiveness of their budgeting process:
1) Review your current strategy
How do you currently approach the budgeting process? Do you follow a particular model and do you understand the advantages and limitations of this model? Have you considered any alternatives?
One increasingly popular budgeting model is that of zero-based budgeting. This transformational approach has been credited with revolutionising not just the budgeting, but the cost management structures of companies such as Kraft and Heinz. Bain and Co. suggest that zero-based budgeting “offers a practical way for companies to radically redesign their cost structures and cut as much as 25 per cent of spending on overhead and support functions, whilst boosting efficiency and competitiveness.”
However, there are a number of other alternatives. Review each one and decide which model (if any) are the most applicable to your business, in the context of what you have in place today.
2) Include your procurement function from the start of the budgeting process
Procurement are in a unique position to capture and share new or critical insights from the supply market, in addition to the insights gleaned from working alongside each division of your business.
Procurement’s holistic view of costs means it should be able to spot efficiencies and synergies within your business, minimising duplication or redundant spending. Bringing procurement into the budgeting conversation in the very early stages gives budget setters access to this critical insight enabling them to build effective and efficient annual plans.
Further, procurement can add value to the budgeting and planning process by advising on decisions and strategies for the year ahead – decisions such as make vs buy – by analysing movements in the supply market and feeding this information back.
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