The dynamic environment in which companies have to assert themselves makes budget planning difficult, but not impossible. There are certain challenges in the VUCA world, but it is precisely because of these uncertainties that it is important to make efficient and effective budget planning. In this article, you will find out how budget planning works, the best practices, and how to optimize and speed up your budget planning process.
What does VUCA mean?
VUCA is a trendy managerial acronym which is short for volatility, uncertainty, complexity, and ambiguity. It is a catchall for “Heads-up!! it’s crazy out there!”
Introduction to budget planning
First of all, there must be clarity about the term “planning and budgeting”. Contrary to the widespread understanding in practice that planning is tantamount to a simple forecast of the future, Planning (medium-term planning) and budgeting (planning for the following year) are to be understood as an expression of the will of the management.
Planning and budgeting, therefore, have an objective character – in contrast to the forecast. This makes it clear that a top-down approach is recommended for strategically oriented planning, whereas the bottom-up approach usually requires several planning rounds to eliminate inconsistencies in the strategy.
Optimal planning is characterized by high control benefits (effectiveness) and a lean planning process (efficiency). The effectiveness is achieved through the reference to the corporate strategy, a high level of integration of the sub-plans (e.g. along the value chain), meaningful plan key figures according to responsibilities and a high level of plan topicality.
Efficiency is strived for through a short timeframe, the focus on planning data that is really relevant to management, the avoidance of planning loops and negotiation games as well as good IT system support.
In the following sections, best practices in medium-term planning and budgeting shall be discussed.
The results of the strategic planning form the basis of the medium-term planning. Medium-term planning represents the first operationalization stage of the strategic goals because it quantifies the strategic target values and supplements them with further financial or non-financial key figures. It is the link to budgeting for the following year.
Typically, the planning horizon for medium-term planning extends to three to five years, with individual annual slices being planned in contrast to strategic planning.
Implementation of budget planning
The budget planning represents the finest level of the individual sub-planning and extends to the planning horizon of the imminent fiscal year.
Depending on the business model in practice, either individual monthly slices are planned, or the annual budget value is broken down linearly or seasonally into months.
The aim of budgeting is the business resource allocation for the following year. The budget thus forms the basis for measuring the performance of those responsible for the budget and is closely related to the incentive and remuneration systems.
The specifications made in budget planning must therefore lie within the budget manager’s area of responsibility and influence in order to achieve the necessary budget acceptance.
The business development, according to the forecast, leads to a delta view compared to the objectives from the medium-term plan or budget. This allows the early detection of deviations and enables the company to define appropriate countermeasures.
The actual added value of the forecast does not lie in the pure prognosis, but in the deviation analysis, which leads to the targeted use of entrepreneurial means to solve problems. After the “forecasting mechanism” or methodology has been created, a regulated process of analysis and definition of measures must follow as part of the management coordination.
This closes the controlling cycle in that the defined measures can be used to work towards implementing the strategy.
Forecast and measures
A high dynamics of the economic environment in which companies operate means that planning data often quickly becomes outdated.
As a consequence, the planning data lose their control relevance for the management, since no current outlook on the course of business is available with old planning data.
Forecasts, on the other hand, provide an up-to-date information base for managing companies during the year. Forecasts make it possible to take timely measures in the event of deviations from the plan. As already described, planning and budgeting (annual planning) are target setting instruments and thus an expression of the management’s will. The forecast during the year, on the other hand, does not represent an objective, but rather shows the level of knowledge in the company about current business developments.
The forecast provides timely information on what measures are necessary to achieve the target (e.g. the early introduction of a new product line or the reduction of personnel costs).
Not all companies make a strict distinction between budget and forecast: Such companies not only use the budget figures as a goal, but they also adjust them several times during the year to the new realities. However, this contradicts the purpose of setting goals, because goals should not be constantly changed.
This is also reflected in the annual target agreements for employees. In addition, there is the high resource expenditure of constant plan adjustment, especially if the budgeting is very detailed (e.g. broken down to cost centre level, individual customers, and sales channels).
I hope my article will help you optimize and speed up your budget planning process. Please, do leave a comment below or contact us if you have an enquiry.