Rapidly Rethinking the 2023 Budget Season

Given the uncertain economic conditions, private equity-backed businesses are hyper-focused on their financial outlook. As a result, CFOs and finance teams are under pressure to ensure that the 2023 budget process is effective, yielding an operating plan to navigate the next 12 -18 months successfully. Adding to the complexity, many companies are contending with integrations after recent merger and acquisition (M&A) activity or facing finance team resource constraints.

These challenges have led CFOs to consider accelerating their 2023 budget preparations. With many companies already experiencing topline and margin contraction or expecting it to occur, management teams will need as much runway as possible to make and execute key decisions. As a result, some finance teams are currently scrubbing their back-half 2022 forecasts and jumping right into the 2023 budgeting process.

In addition to accelerating preparation activities, companies can also benefit from developing multiple scenarios to stress test operations. Scenario modeling can be especially helpful in planning for downturn scenarios when combined with “break glass in case of emergency” operational plans. For example, some companies are developing a roadmap of operational initiatives to right-size their cost structures if trailing 12-month EBITDA or cash flow cross pre-determined thresholds. This preparation allows companies to remain flexible and responsive throughout 2023.

It is also critical to rethink budgeting on the tail of record M&A activity from 2021 and early 2022. Change events, whether a merger, acquisition, or carve-out, will have significant effects on financial planning. In the year immediately following M&A activity, it was common for companies to leverage “high-level” planning techniques while developing their annual budgets. This occurred primarily due to a lack of historical data and limited knowledge of operations. Looking ahead to 2023, CFOs should strive to enact a comprehensive budget process that enables leadership to develop, measure, and execute plans. Here are some best practices that CFOs and finance teams can leverage to enhance annual budgeting:

• Develop and drive a process that is co-led by operations and finance. Management teams leveraging best practice planning techniques view the budget process as an “operational road mapping exercise” that yields a financial outlook.
• Ensure that planners are leveraging the correct operational drivers while developing the 2023 outlook. Planners should strive to replace financial trending techniques with drivers such as pipeline conversion, sales quotas, employee utilization, inventory management, or other relevant operational levers. This practice promotes accountability and will help with variance analysis in the future.
• Establish measurable and meaningful key performance indicators (KPIs) that can be tracked throughout 2023. The KPIs and metrics produced during the budget process should serve as performance benchmarks to be reviewed at a regular cadence with the company’s management and board of directors.

Deploying best practices can increase budget effectiveness, but without a strong baseline of data, accurate planning can be nearly impossible. A consistent, granular baseline of operational and financial data is the foundation of any successful planning process. Finance and operations should dedicate time at the beginning of the planning cycle to develop and agree upon a “one source of truth” data set that normalizes for reporting inconsistencies across legacy organizations and one-time anomalies not reflective of business trends. This is particularly important for organizations that struggle with management reporting and are forced to waste cycle time reconciling data sourced by multiple teams.

Amid workforce trends like the Great Resignation, burnout remains a real concern for finance teams. Burnout can be most prevalent during the budget cycle because planning activities are often stacked on top of day-to-day responsibilities. Leadership teams should consider the following:

• Can certain monthly activities like the management review cadence, external reporting, and ad-hoc analyses be reduced during the budget season?
• Does the current team have the necessary skills and bandwidth? If not, can outside expertise be engaged to supplement and advise the current finance team?

Even when companies reshuffle priorities or engage advisors for support, unexpected attrition can still occur. To assist with the future transition of activities and reduce risk, CFOs should ensure that the planning process is well-documented and all deliverables are stored in a central repository. A well-documented, centralized approach is also helpful during control testing and the year-end audit cycle.