How to future-proof your annual budgeting?

How to future-proof your annual budgeting?

By Kranthi Kumar
Chief Innovation Officer, Red Apricot

Date: 1 June 2020

The annual budgeting process becomes obsolete when the market confronts unpredictable situations. In other words, some uncontrollable factors like Political instabilities, Natural disasters, and Pandemics affect the market to a great extent. They can cause irrecoverable damage to businesses.

The recent outbreak of Covid 19 is one such uncertainty that is shaking the entire world. Its impact on businesses is slowly but steadily felt. So, can the annual budget still be relevant in this unpredictable scenario? Before jumping into it, let’s first see:

What is the annual budgeting?

An annual budget is a 12-month plan for a company’s projected expenditures over a year. It acts as a benchmark and helps companies in tracking progress. It allows companies in the effective utilization of resources to achieve overall organizational objectives.

Pertinent questions to ask at this point are, how valid the annual budgeting process can be amidst these unpredictable market situations? Are conventional budgeting practices good enough to tackle these scenarios? An obvious answer to these questions is ‘No’.

This article aims to take you through the critical components of effective budgeting processes that help mitigate these unpredictable risks, if not eliminate them.

An effective budgeting process needs to go beyond conventional practices and involve regular planning and forecasting to assess the impact of market situations. These assessments should help in determining the course of action of the business in these tricky situations. The two major components that make budgeting processes effective are as follows:

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Collaboration and Alignment:

Collaboration and Alignment can aid the budgeting process to tackle these uncertainties to a great deal.

The ability to identify an organization’s objectives and collaborate across its hierarchical levels to create or update plans can future-proof the budgeting process. Plans can never be unidirectional. A robust budgeting system should involve frontline planners by collecting their inputs and communicating back the organization’s direction. This way, the frontline planners can communicate to the top management, the ground-level realities based on the market situations. This approach will pave the way for a budgeting system that is relevant and realistic even in these unpredictable scenarios.

Most of the current budgeting systems lack these critical components. They are mostly driven as a financial data collection process with zero visibility of initiatives or activities that budget is made for.

The lack of involvement of frontline planners will only make this entire process time-consuming and challenging. It will pose severe difficulties for businesses to identify discretionary vs non-discretionary income/expense streams and to prioritize their investments.

Hence, it is of pivotal importance for organizations to take a closer look at their budgeting processes and introspect on their effectiveness. Collaboration and Alignment can add life to the otherwise ineffective budgeting processes that are performed as mere rituals.

Real-time access to Relevant operational data

Collaboration and Alignment are no doubt essential but what is equally crucial is real time access to relevant operational data. Business teams and frontline planners can assess the impact of changes, only if they have access to actual data in real-time. Unfortunately, this is very challenging. Most of the ERP systems are set up in a way to track actuals either at the department or business unit level. They seldom provide insights on market situations impacting business performance.

Financial information, when coupled with operational data from data warehouse or data lake, can help better understand the impact. The data warehouse or data lake is often perceived as a source of entire data that the organization can access. However, the real value of the data lake can be realized:

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This will help the organization to assess the impact of market conditions in a better way and improvise their budgeting processes.

These two critical components can uplift your existing budgeting processes and turn them future-ready to tackle any uncertainties.

In both these components, the are three key points to look at:

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Businesses addressing these key points will be in a better position to build more realistic and relevant annual budgets to tackle the market conditions.

Red Apricot’s JustPerform is a cloud-based platform that helps in addressing these critical points by utilizing Planning Info blocks (like Lego blocks) to build business Value Driver Trees. These Value Driver Trees lays the foundation for entire business planning, management reporting, and decision-making process.

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JustPerform takes the help of technologies like Artificial Intelligence, Machine Learning, SAP Analytics Cloud, Data warehouse cloud, SAP BPC or BW4HANA in collecting the relevant data for the Value driver tree. It then connects to operational systems for businesses to plan and analyze their business drivers & metrics.

To conclude, JustPerform helps in building a future-proof and risk-free budgeting process.

Come! Adopt the JustPerform approach and make your annual budget relevant and effective.

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