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It’s time to say goodbye to traditional budgeting!

May 27, 2020

67% of companies from all sectors emphasize the necessity of adopting more sophisticated budgeting methods enabling a more dynamic and agile budgeting approach.

They feel it is time to move away from the tried-and-tested static approach that relies on inefficient processes and brings unsatisfactory results. This blog series provides an insight into an analytical approach to understand the shortcomings of conventional budgeting by presenting the ideal business solution: Smart Budgeting.

Over the last two decades organizations have debated whether traditional budgeting actually meets their organizational needs. Practitioners of traditional budgeting portray it as an inflexible process that attempts to allocate an organization’s scarce financial resources to business units, activities and investments for a defined period of time. However, a recent CFO Research Services survey with 150 CFOs found that 72% of participants believe that budgeting yields unrealistic numbers. A further 68% of CFOs are convinced that changing the way the organization approaches budgeting would enhance corporate value. On the one hand, adopting more sophisticated smart budgeting methods would contribute to more accurate performance management and organizational control. On the other hand, many organizations hesitate to introduce innovations and avoid undergoing changes in controlling processes and systems due to the lack of know-how in the latest technologies.

Why do finance departments need an update in their budgeting approach?

The key reasons for an update to budgeting are highlighted by the main challenges businesses face from traditional budgeting:

  1. Infrequent and long-winded budgeting reports with outdated and static numbers
  2. Inaccuracies based on assumptions and guesswork from previous year’s numbers and the continuous use of unreflected budgeting methods without considering external or internal performance standards
  3. Inflexibility eliminates drive for constant improvement and does not fit within the dynamically-changing business environment
  4. Time-consuming process requires an intense analysis of last year’s budget and actual results according to the survey shown in figure 1, organizations usually need four to five months and 20% of managerial time to prepare a budget
  5. Decision-making power is granted to CFOs that enables them to control the budget allocation and to manipulate figures to make actual results appear more attractive than presented by the actual business situation
Figure 1: Duration of the traditional budgeting process based on Der Controlling-Berater

How can we tackle the challenges of traditional budgeting? The answer is simple: Smart Budgeting! Take this opportunity and get one step beyond your competitors with Smart Budgeting to become a Smart Leader!

Smart Budgeting makes planning an agile, rapid and continuous process by enabling a flexible and monthly budgeting as well as rolling forecasts.

We have found that agile work approaches with several process stages enable constant and decentralized collaboration with all stakeholders. This leads to continuous improvement and iteration at every stage. Furthermore, analytic functions in the context of Smart Budgeting enable an investigation of critical issues with the help of enhanced operational data that considers both internal and external events such as industry downturns. Sophisticated and collaborative planning models are additionally supported by enhanced data sources and smart calculations. Although CFOs have always been challenged to use accurate data within the budgeting process, today’s technologies allow capturing and management of larger amounts of data from diverse users and data sources for both financial and operational planning.

Figure 2: The Three Pillars of Smart Budgeting

Consequently, CFOs are supported in the decision-making process by using current data to generate new insights and identify new performance drivers. Furthermore, by linking corporate strategy and execution CFOs open up new value creation opportunities in real-time and can better allocate their resources to appropriate discretionary investments and targets. Ultimately, organizations increase internal and operational efficiencies. According to a survey by Gartner, this is exactly the goal of CFOs when purchasing a budgeting solution: 77% of organizations want to achieve an increase in internal operational efficiencies and 48% desire an enhancement in the decision-making process.

According to Gartner, many budgeting solutions provide CFOs with supplementary functions beside budgeting and planning process support. In this context, smart budgeting capabilities need to be closely aligned with integrated financial planning, financial forecasting and modeling as well as performance reporting. By linking corporate strategy to a smart budgeting process, the organization becomes enabled to manage and improve performance holistically.

Figure 3: Smart Budgeting Integration

Stay tuned for more information on Smart Budgeting by Capgemini Invent.

This blog is authored by Kerem Cigerli and Leif Henrik Westendorf.