A finance team’s guide to effective budgeting and forecasting

If you’re already thinking ahead to next year’s budget, you’re not alone. Fourth quarter is “planning mode” for finance teams as they gather the necessary information about the current year’s performance and start thinking ahead to the next year. 

Exciting, perhaps? It’s the time to strategise and set goals, some of the most important functions of growth. It’s also a time for any finance team to work across the organisation to ensure that the financial forecast is realistic — balancing the right amounts of growth, prudent financial management, and a healthy dose of caution. 

In this article, we’ll go beyond CFO forecasting that happens in a vacuum. Instead, we’ll focus on the team dynamics and useful exercises required for any finance team to successfully prepare a financial plan for the new year. 

Keep your goals front and center

When it comes to budgeting, the entire company has to be aligned around a strategic plan. The upcoming year’s budget — while being part of a short-term plan — should also fit into long-term goals.

While the strategic plan is usually defined by the executive-level vision, finance teams play a crucial role in putting numbers around that vision. An investment in resources, for example, may be tied to hitting certain benchmarks throughout the upcoming year.

It’s easy to become overly ambitious about the company’s growth. Accurate forecasting depends on understanding the market conditions, the competitive landscape, and the projected success of company initiatives (such as sales and marketing efforts).

Finance teams can ensure the goals are realistic by basing forecasts on historical data. If you don’t understand what drives revenue, you can’t predict what will move the needle. Without that understanding, you can’t link the company’s overall financial goals and an accurate financial forecast.

Involve all departments to secure buy-in

Your company’s leadership team may have an overall vision, but department heads will likely also have specific budget requests, such as increasing headcount, replacing hardware, offering new employee benefit programs, and more.

That’s why it’s important to involve the appropriate people during the planning process. A specific line item in the budget may not tie into the overall company goals directly, but is still a necessary cost of doing business. The finance team also needs a clear understanding of known expenses for each department, what may change in the coming fiscal year, and why.

Of course, just because a department makes a request doesn’t mean it will come to fruition. It’s the finance team's job to strike the balance of everyone’s “wish list” with the budget and forecast for the coming year.

Because of this, communication is key to making sure each department head understands what decisions were made. This may involve several rounds of meetings and discussions before a proposed budget is shared, and the budget may go through several iterations before everyone is on board.

It’s also important that department heads understand that if certain targets must be met (like a revenue target or a specific date) before additional money is spent (like a new employee) that they’re clear about what those benchmarks are. Nothing should come as a surprise in the following year.

Incorporate scenario planning

Your finance team may prepare a budget according to a specific forecast, but what if your projections don’t pan out?

Part of a strategic plan can involve taking risks. After all, that’s what leads to company growth. But those risks may not lead to the expected growth, or an unexpected market shift can play a factor.

To best prepare, you can plan for different scenarios. You may choose to operate on a best-case scenario, or even a conservative growth scenario, but you should still plan for a worst-case scenario. It’s better to prepare for a worst-case scenario and know what steps you would take to protect the company’s finances than to make decisions mid-year and while under stress.

As much as you can, separate the known from the unknown. You may have recurring revenue that you can depend on versus new revenue that’s projected. Or you have expenses that you’re contractually obligated to pay. You can create scenarios based on the factors that are more volatile.

If you approach budgeting with multiple scenarios mapped out, you can plan more effectively for the upcoming year.

Consider rolling forecasts

An alternative approach to annual planning is a rolling forecast. Rather than a year-long budget that may need to be adjusted throughout the year as conditions change, rolling forecasts are a continuous process.

With rolling forecasts, you start with your current (or a slight variation thereof) and make changes as you go. The budget is regularly reviewed and evolves. If done correctly, it allows the company to be more agile and encounter fewer surprises throughout the year. 

Your finance team would need to determine how frequently the budget is reviewed, allowing enough time to react to changes in the forecast. Many companies review the budget monthly or quarterly. You’ll also select a time horizon for your forecast. For example, if your time horizon is four quarters, you’ll continuously roll your forecast so that you’ve always projected four quarters into the future. 

If your business is particularly susceptible to market conditions, a rolling forecast allows the finance and leadership teams to make strategic decisions based on current information.

Embrace technology

If your finance team is still relying on Excel spreadsheets, you’re making the work harder than it needs to be. In addition to being time-consuming and the risk of error, you can’t create the sophisticated budgeting and forecasting models that today’s successful companies need. Scenario planning and rolling forecasts would be particularly tricky without technology to automate the process and allow you to adjust variables quickly.

Cloud-based and SaaS products are now table stakes for all areas of finance, allowing you more flexibility and more accurate predictions than manual options. It’s an investment that easily reaps rewards for your team.

Not sure where to begin? Read more about the best tools to build a modern finance tech stack here.