Q+A: How Finance Teams Can Improve Budgeting Amid Uncertainty

Business leaders in today’s constrained landscape increasingly seek to ensure that financial planning approaches drive rapid and sound decisions. This expert interview explores how CFOs and stakeholders can accelerate and rethink annual budgeting efforts to ensure the 2023 budget process is effective.

Expert Q+A

As CFOs and finance teams begin preparing for the 2023 budget season, what are the key challenges?

Eric Markovich (EM): CFOs and finance teams, especially at private equity (PE)-backed companies, are contending with three major challenges: (1) forecasting and budgeting accurately amid economic uncertainty, (2) integrating recent merger or acquisition activity — which can be disruptive to setting a meaningful full-year baseline for company financials and operations, and (3) dealing with a constrained employee market and attrition among finance professionals.

What practical actions can companies take to address the first challenge (financial planning amid uncertainty)?

EM: Today, finance teams are accelerating their planning efforts. We have observed some teams scrubbing their second-half outlook and jumping straight into 2023 planning. There is also a high degree of prioritization on scenario planning. This allows for a company to stress test their business and create “break glass in case of emergency” contingency plans. For instance, a company can develop a set of pre-determined cost reduction initiatives to be triggered based on trailing 12-month EBITDA or cash flow thresholds. Plans like these can ensure a nimble response when a company faces a time of need.

When preparing to launch a budget process, what missteps can finance leaders avoid?

EM:  The biggest mistake we see finance teams make is carrying forward old planning processes and assumptions. The budget should be a financial representation of a company’s latest operating model and corresponding goals. Investing time up front with the management team to discuss the correct KPIs, accountability matrix, compensation schemes, growth trajectories, risks, investments, and other topics can help ensure alignment from day one and avoid rework in the future.

What role should industry benchmarks play in relation to annual planning?

EM: Opinions vary on how useful benchmarks are, with some viewing them as an objective standard, while many CFOs anchor to a “bottoms-up approach.” For instance, if an industry benchmark calls for extremely lean numbers in a technology spend category, the organization might not reflect similar infrastructure, competencies, or realistic headcounts, so it could be a misstep to aim for a number that would inhibit current operations or identified strategies. It’s usually best to build a bottoms-up budget where CFOs can focus on metrics that matter most within the organization’s unique context. 

How critical is it to have a broad representation of stakeholders in the annual financial planning process?

EM: It is essential to have a broad representation of financial and operational stakeholders in the budgeting process. In fact, we advise management teams to designate both financial and operational leaders to drive the process. Too often we see companies treat budgeting as a financial targeting exercise. This can lead to a lack of accountability when measuring operational teams against budget, difficulty explaining variances versus plan, and a fractured operating strategy. Management teams should treat the budget process as an “operational road mapping exercise” to chart the next 12 to 18 months. The financial outlook should be considered a derivative of the operational exercise. This approach will require finance and operations to work in lock step throughout the process, ensuring alignment and ownership company wide.

As companies face the Great Resignation and leaner teams, how does a constrained workforce impact teams involved with annual financial planning?

EM: During budgeting and planning cycles —which can be a three-month grind, during which finance teams’ day jobs don’t get put on hold— burnout can be a significant challenge. CFOs and private equity management should consider bringing in supplemental help during budgeting efforts and —because attrition can occur unexpectedly— ensure that their finance teams are documenting and centralizing information. This helps avoid rework or hunting through departed team members’ emails and files. Plus, a well-documented, centralized approach often accelerates control testing during the year-end audit.