For most accounting and finance professionals, good stewardship of the company’s assets is a core principle of what we are tasked to do. Good stewardship can range from designing and maintaining a strong framework of internal financial control to managing and reporting performance against budget and forecasts. It can also mean taking the lead in designing a planning process that is effective and efficient to maximize the company’s resources. A less than meaningful budget or forecast is wasting time and energy.
An example of creating a more effective and efficient budgeting process is work I led at a national consumer goods manufacturing company. Their budgeting process took approximately 6 months from start to Board of Director approval and went through 4-6 bottoms up iterations. The budgeting for cost of goods was done at an extremely low level of detail adding additional time and complexity.
The client wanted to reduce the budget timeline to stop wasting valuable company resources, all without an investment in new technology. To achieve this we implemented:
Active Communication – Involved the stakeholders in the process
Historically, finance emailed target numbers to the key stakeholders. Instead, finance actively engages with key stakeholders in target setting meetings. This requires multiple meetings with clear agendas and expected outcomes for each primary budget area: Revenue, Cost of Goods and Operating Expense. As a result, the groups collectively set targets that aligned with the corporate strategy while being achievable “stretch” goals for the business.
Process Segmentation – Broke up the budget process into manageable pieces
For this client, we started with Sales/Revenue then Raw Materials/Direct Labor and closed with Operating Expenses. Subsequently, each of the expenses breaks down between marketing, supply chain, and support functions. Allowing the key stakeholders and planner to focus and get a plan in place that achieves the targets in less time.
Detail Reduction – Identified the most critical and impactful values
Instead of budgeting for every raw material item, using simple regression analysis, we identify 5 raw materials that account for over 85% of the spend. This significantly reduces the time previously spent planning for over 4,000 raw materials. Yet, allows for reasonable projections while balancing the impact to resources.
50% Time Savings = True Value
As a result of these changes, the client saw over 50% reduction of time to complete the budget. Furthermore, the budget was completed with only two iterations and 99% fewer line items needed to determine cost of goods. These are significant improvements that drove “real” return on investment!
Now is the time for your company to significantly move your planning forward. Leave behind the annual planning process that many consider being a complete waste of time.
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