Looking forward with driver-based budgeting

13th Jan, 2020

Financial teams are often stuck in a never-ending cycle of manual processes; from reconciling variances to inputting department budgets across a number of different Excel worksheets, all whilst fixing incorrect data and broken formulas. If these processes sound familiar to you, you can probably feel the visceral frustration forming in your fists.

This frustration further builds up for CFOs, when static budgeting processes cause them to present budgets, modelled from long out-of-date facts, figures and assumptions, to a board of unimpressed directors. The simple fact is static budgeting processes are just not equipped for the modern-day work environment, in which real-time information and agility are essential for survival.

In comparison, CFOs that have adapted to driver-based budgeting are enjoying the benefits of simpler processes. With driver-based budgeting, these CFOs are able to create adaptable, dynamic and swift financial processes that align forecasts and projections with internal and external drivers; keeping all their presentations up-to-date with the latest data and information. This flows on to well-informed stakeholders, who can now make effective strategic decisions aligned with operational goals.

Strategic budgeting for a rapidly evolving landscape.

Driver-based budgets are superior to static budgets in every way. They have a far greater array of capabilities, and they do it far quicker. Driver-based budgets are capable of not only allocating resources based on past performance, but they also allow CFOs to react immediately to changes in the market, drive business priorities, and create a data-driven process. Driver-based budgets enable active real-time planning - compared to the stagnant fixture of outdated annual planning using static budgets.

Speed and the ability to adapt is essential in the contemporary business landscape. Within a highly turbulent market, transforming trends, evolving technology, and rapidly changing consumer tastes, CFOs need to react and generate timely and relevant budgets for stakeholders, and for their business to thrive.

Data Silos are a no-go.

In the past, CFOs would strenuously construct budgets using data from a variety of different sources throughout the corporation. Different departments would often assemble budgets with no idea of how their performance is linked to greater initiatives, and consequently financial teams using that data would often be left trying to piece together the puzzle. Data silos in budgeting hide away the impacts of expense and revenue projections downstream for stakeholders.

An example of data silos creating budget chaos can be seen in poor internal communication. Let's say there was an upcoming partnership deal for Company X with Company Z. The development team and the financial team may have different approaches on how to calculate revenue and budget based on the partnership. The Company X CDO could be constructing what-if scenarios without the consultation of Company Z or the Company X CFO, simultaneously the Company X CFO could be constructing a budget in close communication with Company Z. With poor communication and differing methodologies there will be discernible differences in budgets until communication between teams is resolved.

No matter the size of the company or industry, CFOs can create greater collaboration and remove budget silos by streamlining data sourcing to a single entity and generate rolling forecasts and a central, easy-to-reach planning resource. An upstream data integration will help collaborators to examine budgets in connection with the wider strategic goals and contexts - leading to greater alignment of support from stakeholders.

Therefore, the elimination of data silos is hugely beneficial for developing an efficient and effective budget process that fosters business performance.

Determine the KPIs which drive finance and link to the operational plan.

KPIs can quantifiably measure all operational activities and processes. By integrating KPIs into budget creation, resource allocation can be optimised based on past performance. CFOs can choose to track different amounts of KPIs to get a reliable measure of business performance, but having too many KPIs can create an overload. As the current emphasis in the modern business climate is time-efficiency and effectiveness, keeping track of too many KPIs can be a time-costly process that skews how budgets are created; irrelevant KPIs can actually take your budget away from aligning with the organisational goals.

KPIs need to have strategy placed behind its integration into the budgeting process. But when the most relevant and effective ones are selected, CFOs will be able to make accurate course corrections, and align budgets based on business performance towards organisational goals and agendas.

Understanding targets versus forecasts.

When using driver-based budgeting it is important for CFOs to be able to differentiate between targets - where the organisation wants to go, and forecasts - where the organisation is predicted to head. Targets themselves should be based on the company's aspirations of what they want to do, while forecasts should be based on data of past performance, key trends and differing what-if scenarios. In the separation of targets and forecasts, CFOs can have a clearer and better organised budgeting process that accounts for, and continually adapts to, changing market forces.

If new investment is being created within an organisation, the finance team may have to conduct scenario testing based on unknown variables such as delivery delays, technical faults and human error. CFOs using a driver-based budgeting process would ask and develop plans that cover these scenarios. Actions such as calculating projections of increased cost prices, contingency plans and measuring the impact of worst, best and likely case scenarios. Targets can then be reviewed based on the projections of whether they are likely to be achieved in this time period or not.

CFOs are expected to navigate through increasing levels of uncertainty and complexity through utilising automation, standardisation and streamlining of systems, data and processes. Driver-based budgeting assists CFOs with drive margin expansion, superior analytics and reporting, business performance management and growth initiatives.

How does MODLR help?

Driver-based budgeting is made effortless with MODLR. CFOs can easily pick up MODLR to delve into simple yet effective automation, streamlining and standardisation processes of their systems, data and processes. MODLR gives CFOs the agility and the know-how to quickly adapt to changing market scenarios with rapid model building of what-if scenarios and a superior analytics and reporting system than any other performance management system on the market.

To see how MODLR can organise your financial systems for the future, register a free account here.

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