Corporate Finance

Metric of the Month: What is the Ideal Number of Budget Iterations?

Use these three strategies for a faster, stronger, and more realistic budget.
Perry D. Wiggins, CPAOctober 1, 2020

Budgeting season is upon us, and the usual stresses and headaches that come along with it will likely be compounded by an especially volatile year. Reviewing and editing draft after draft of your budget will be time consuming, frustrating, and may even risk disengagement from your stakeholders. In this month’s column, we’ll review three practices that help leading companies get it done much more quickly and with a better final product.

As a CFO, the ideal number of budget iterations I would seek for my own organization is three to four. The first iteration is a preliminary version, while the next two to three come after successive rounds of collaborative meetings in which stakeholders get on the same page, review, and fine-tune the numbers. This ideal is consistent with APQC’s Open Standards Benchmarking database in planning and management accounting, where we find that that top performers produce four budget versions or less before final approval.

After that fourth version of the budget, people become more likely to bake in whatever numbers they think will make you or other executives happy just to finish the work. That’s the last thing you want. At the end of the day, budget numbers should be realistic, achievable, and produced with a collaborative eye to driving better results for the business. Bottom performers, which produce eight or more versions of the budget before final approval, are at much higher risk for the kind of disengagement that leads to unrealistic and inaccurate budgets.

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Wait for More Data and Insight

Starting the budget too early is one of the most common causes of a painful and frustrating budget process. The amount of time it takes to build the budget can vary based on the size and complexity of your company, but a longer planning cycle requires you to predict events that may still be too far in the future. If you start too early, any assumptions you may have started with may be out of date by the time the budget is issued.

This year my organization is starting the budgeting process in October, about forty days after our usual start time in August, because we’re trying to take in as much information as we can about what 2020 has been like. Starting earlier would likely require us to go back to the drawing board multiple times, because 30 days from now we’re going to have a bit more clarity (good or bad) about how 2020 is going to impact our budgeting for 2021. Whenever you typically start your budget, waiting a bit longer this year means you’ll have more data and insight to help shape it.

Build in Transparency and Collaboration in Budgeting

Long before a company starts building a budget, everyone who has a stake in the process needs to come to a common understanding of reasonable and achievable stretch goals for the next year. Transparency and open, clear communication provide a foundation for the kind of iterative, collaborative budgeting that accomplishes a final draft in fewer rounds.

Leaders can sometimes have a goal in mind for a given business unit that is wildly different from what business unit leaders see as achievable, or hold back details that are important for a realistic budget. Events like strategic planning meetings and budgeting kickoff sessions provide opportunities to work for buy-in through open discussion so that ultimately, stakeholders can take a feasible set of stretch goals back to their department, location, region, or business unit to help shape their budgets.

Just as executives should be transparent with management and other stakeholders, transparency needs to flow upwards to executives and horizontally to other business units as well. If a manager creates a budget within her own silo, she might be confident that her team can deliver on its goals, but this doesn’t account for the workflows or other efforts that support that silo. Without interdepartmental negotiation and information-sharing, you can count on multiple rounds of edits and a more lengthy, intensive budgeting process.

Get Your Data House in Order

Even the most transparent and collaborative budgeting process can be hampered by poor data practices. With so many hands shaping the budget, it’s critical to standardize the data and the processes that support it. Cloud-based tools can help you avoid multiple versions of the truth and the errors that come with them. Many of these tools update the data in real time, which helps everyone to see the immediate impact of budget changes and inputs made at the unit level or department level. If these tools aren’t available for your organization, make sure that you at least have governance with strict version control in place.

Crafting your company’s annual budget is a time and labor-intensive endeavor. So far, 2020 has only offered complications that will make it even more difficult for some companies. Proper timing, collaboration, transparency, and strong data governance will help ensure that your budget is done with fewer iterations and reflects a realistic set of assumptions, goals, and expectations for 2021.

Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.