As the third quarter unfolds, finance leaders are deep in the critical process of budgeting and annual planning. On a recent episode of The FP&A Tomorrow Podcast, host Paul Barnhurst and I shared tips and lessons for a successful budgeting season.

I kicked off our discussion by highlighting the transformative impact of executive leadership’s genuine belief in the budget as a management tool. I’ve seen firsthand how effective it is when executive leadership team (ELT) members have their annual reviews and compensation tied directly to budget performance. This creates an immediate and powerful partnership with FP&A, driving business leaders to construct achievable budgets that align with their goals. This level of discipline and process, I’ve noted, often distinguishes more mature organizations.

Paul echoed this sentiment, sharing a powerful anecdote of a company’s remarkable transformation within a single year. He recounted a challenging initial budgeting experience where a lack of detail and understanding led to numbers that were immediately off-target. However, the arrival of a new CFO spurred a complete overhaul. Models were rebuilt, and finance professionals were empowered to truly “dig in and understand the business.” This shift fostered a deep comprehension of key drivers and assumptions, leading to a budget that was not only met but exceeded. Paul emphasized that continuous improvement in budgeting processes, coupled with strong leadership and a thorough understanding of the numbers, is paramount for success, especially in larger, more stable businesses.

One of the greatest successes I’ve seen in budgeting is when executives aren’t just behind the budget, but “believed that the budget was a way to help manage a company.” This fundamental belief changes everything, turning a finance exercise into a powerful strategic tool.

Paul shared a similar experience that highlighted the importance of deeply understanding the business, remembering a moment where his CFO was “beaming over in the corner to see that transformation from a year earlier when (the CFO lacked clarity, but now can say) no, I’m confident we can actually hit our numbers and here’s why.”

The conversation then shifted to common budgeting pitfalls. I’ve seen the dangerous misconception that the budget process can be rushed. I’ve witnessed scenarios where CFOs believed a budget could be finalized in a single month, only to find the organization still mired in the process months into the new fiscal year. This delay, I’ve warned, can bring an entire business to a halt, impacting hiring, target setting, and overall operational efficiency. 

Underestimating the complexity and time required for thorough planning is a recipe for chaos and poor outcomes.

Paul added to the list of “worst things” he’s encountered, pointing to the erroneous practice of replicating prior year data without considering seasonality or growth. He cited an example where compensation for a new hire was duplicated from the current fiscal year to the next, and this presented an issue because the employee was hired mid-year and didn’t have a full year of expenses. This left the department significantly short of the budget it needed. (For example: if an employee is hired on July 1 and has a base salary of $100K, the department will only incur $50K in base salary expenses during the year the employee was hired, but it will have $100K for base salary in the following year). As underscored by the podcast discussion, when digging into the details, most businesses will need to account for some type of seasonality or growth. 

Both Paul and I emphasized the crucial role of FP&A in educating business partners on the true costs of decisions, such as understanding that a $100,000 salary with a 20% bonus isn’t just $120,000 in cost but includes additional factors like payroll taxes and benefits. This educational aspect is where FP&A truly adds value, ensuring financial literacy and accurate planning across the organization.

Top Tips for a Successful Budget Process

In the spirit of sharing best practices, Paul and I unveiled our individual “Top Five Tips for a Successful Budget Process.” Interestingly, we curated our lists without seeing each other’s, leading to some revealing overlaps and fresh perspectives.

Glenn Snyder’s Top 5 Tips for Budget Season:

1. Take a full-service approach to budgeting: In business, each function has its strengths. For example, Marketing does marketing better than everyone else, and Finance does finance better than everyone else, so it doesn’t make sense for Finance to expect Marketing to do finance work. Instead of pushing templates onto other internal business partners, finance should take the lead. A full-service budgeting approach aligns the work and keeps each team focused on their strengths. Finance can initially populate the budget, then engage in a collaborative conversation with business leaders to refine and adjust. This ensures accuracy, eases the burden on non-finance personnel, and guarantees proper data alignment.
2. Budget for vacancy and compensation: By proactively accounting for employee turnover, companies can save significant funds (potentially tens of millions of dollars, as explored in this related article) that can then be strategically reallocated to growth initiatives, rather than being locked up in individual department budgets as “padding.”
3. Obtain department manager sign-off: The budget should be a tool for department managers to manage their business, not just a finance exercise. Ensure their comfort and understanding of the numbers.
4. Communicate timelines and expectations: Ensure all stakeholders, especially department managers, are fully aware of deadlines and what is expected of them to facilitate proper planning.
5. Give yourself enough time: Avoid the “fire drill” by starting early and allowing ample time for the inherent complexities of the budgeting process.

Paul Barnhurst’s Top 5 Tips for Budget Season:

1. Develop a high-level budget before starting: Prior to any meetings, FP&A should formulate an initial high-level view of the budget. This foundational work facilitates the “full-service budgeting” approach, enabling finance to present a starting point for discussion with business partners.
2. Ensure management alignment on timelines, assumptions, and targets: Strive for high-level alignment on key parameters upfront. Without clear targets, the final budget may be unrecognizable and unmanageable for the business, leading to frustration and disengagement.
3. Build a detailed calendar and checklist with padding: FP&A should proactively develop a thorough calendar, adding buffer time to deadlines. This accounts for inevitable business “fire drills” and prevents delays in the overall budgeting timeline.
4. Hold a kickoff meeting for alignment: Before diving into the details, hold a comprehensive kickoff meeting to align on targets, assumptions, and the overall calendar, setting clear expectations for everyone involved.
5. Check in regularly: Implement regular, brief touchpoints (daily or twice a week, as needed) where stakeholders can ask questions and address concerns, ensuring a smoother process.

Paul and I both emphasized the critical importance of organization and communication as overarching themes for successful budgeting. From detailed calendars to consistent communication with all stakeholders, from departmental managers to the CEO, clear preparation is key to navigating the budgeting process effectively.

Top Pitfalls to Avoid in the Budgeting Process

Just as important as knowing what to do is understanding what not to do. Paul and I also shared our “Top Five Pitfalls to Avoid” during the budgeting process, offering valuable lessons from our experience.

Paul Barnhurst’s Top 5 Budget Pitfalls to Avoid:

1. Adjusting the budget without communication and buy-in: Never make changes to the budget without informing and, whenever possible, getting buy-in from the business. Unilateral adjustments erode trust and can lead to frustration and a lack of ownership. Even if a mandate comes from the top, communicate it transparently and offer support in re-allocating funds to meet the new target.
2. Including every immaterial line item in templates: Simplify templates for business partners by focusing on material expenses. Overly detailed templates can overwhelm and distract from strategic discussions.
3. Finance as an “order taker”: Avoid language like “this is your target, so tell me what you want me to do.” Instead, foster a collaborative “we” discussion, setting targets together and working as a partnership.
4. Blindly trusting business assumptions and numbers: Always validate assumptions and numbers provided by the business. For example, don’t assume new hires will be 100% productive from day one, or that their full burden cost is simply their salary.
5. Negativity: Don’t let the budgeting process become a source of dread. Paul shared a valuable tip: implement a “complaint session” at the start of meetings to air grievances, then shift focus to solutions.

Glenn Snyder’s Top 5 Budget Pitfalls to Avoid:

1. Moving targets: Constantly shifting budget targets without clear, catastrophic market changes will breed frustration and kill trust. Get executive buy-in on targets upfront and maintain consistency to ensure the business can effectively manage to the plan.
2. Operating in a vacuum: Similar to not making it an internal finance project, operating in isolation (lack of communication, not listening, not engaging) will lead to frustrated business partners and a dysfunctional budgeting process.
3. Not leveraging business metrics as drivers: Go beyond simple percentage growth. Understand the underlying business metrics—the “why” behind the numbers—such as new product launches, market expansion, or sales team growth. This contextual understanding enriches the budget and provides a clear narrative.
4. Not listening to your business partners’ needs: Be flexible and responsive to the realities of the business. Finance should be a partner in problem-solving, not a rigid enforcer of numbers that don’t align with operational needs.
5. Making budgeting an internal finance project: The budget is a tool for the entire organization to manage itself better. If finance operates in a vacuum, the business won’t buy in, undermining the purpose of the budget.

Paul and I both emphasized that the budget isn’t merely a mathematical exercise; it’s a critical planning tool for managing the business. 

As Paul underscored, “Plans are nothing; planning is everything,” highlighting that the core of budgeting is about alignment, communication, and moving the business forward to achieve its strategic goals. 

I added that FP&A professionals must remember our ultimate goal: to drive better decision-making throughout the company.

For all FP&A professionals, whether in large corporations or agile startups, here’s a final piece of advice: use the budgeting process as an opportunity to connect and learn about the businesses you support. Ask what’s behind the numbers, understand their challenges, and truly enhance the partnership between finance and the operational teams. This deeper understanding will not only improve the budget itself but also enable FP&A to become a more impactful and strategic partner year-round.

Listen to the full episode of The FP&A Tomorrow Podcast to dive deeper into these budgeting strategies.

 

Plus, read insights on budgeting for vacancy, find other key takeaways from podcast discussions on elevating the role of finance and building resilient FP&A teams, and explore three critical ways Riveron is helping CFOs move from chaos to clarity.