Founder Partner at AKMK & Associates, Manish Kagathara is a gold medalist commerce graduate & chartered accountant having experience of more than 15 years in management consulting. He has worked with diversified groups like Reliance, Suzlon, Sunflag & HSBC. He has been instrumental in implementing Budgeting Systems to drive the business growth of many organisations to the next level as a strategic initiative.

The COVID-19 crisis has created a significant impact to each and every business across the world. Every function across the organisation are forced to think resilience & sustainability like never before in these extremely turbulent times. The resilient organisations will be able to deliver better in the next new normal – post COVID-19 world. We can term those organisations as resilient organisations who have built up bounce back capabilities, adaptive decision making process & cost structures, stronger balance sheet with capital power.

So now that budgeting exercise is to be started for upcoming financial year, the important questions are –

• Is budgeting exercise relevant in this uncertain time?
Yes. But the entire budgeting exercise has to be revamped with strategic purpose – resilience & sustainability, in mind. The routine approach will not serve the purpose in this uncertain time where forecasting is so challenging.
• Why revamped budgeting exercise is necessity in this uncertain time?
• Can take transformative strategic decisions in line with company’s goals
• Afresh understandings can unlock significant values across all functions & stakeholders
• Agility & speed in decisions on resource allocation

So let us take a fresh look at the regular budgeting exercise & understand how to revamp it in view of the current turbulence, impacts on businesses and making organisation more resilient.
“Failing to plan is planning to fail.” Alan Lakein. The quote written before several decades still holds good.

Many organisations have budgeting procedures designed & operative but lacks the strategic purpose. Many organisations may not have felt the need of it but now they require it as they have grown beyond a certain scale. So, all these organisations have to understand Why & How to establish or revamp Budget Procedures with strategic purpose? More specifically from the viewpoint of current uncertainties & building a resilient organisation.

What is Budget Process?

• Estimate of income and expenditure for a set period of time.
• Opportunity to control the surplus and prioritize expenses for best functioning of the organization & departments.
• Benchmark & standards for consistent introspection of strategy, activity & expenses.
• Effective delegation tool for the top management
• Makes sure that money is being spent in the right direction and goals are attained.

Approaches to Budgeting-
Top Down & Bottom Up can be adopted for budgeting. In Top Down approach, top management executives sets the goals for budgets. The lower management is not involved in the budget process. Bottom Up approach involves participation by the each function in accordance with the guidelines set by the top management. Inclusive approach assures high probability of success in implementation budget process.

Budget Process – Annual
We should adopt systematic approach to gain the strategic advantage out of the budget process. Sample set of planning & budget processes for a manufacturing organisation follows.

If budget & plan is not aligned with vision & goals, there is a big possibility that the vision & goals will remain just on paper. For e.g. if the company has set a vision of achieving geographic sales presence in each state of India with mission to achieve turnover of INR 10,000 crores by end of 2025, it shall be well integrated in the budget process of FY 2020-21 & all following years. Similarly, plans (set of activities & strategies) are link between vision framework & budget. For. e.g. company plans to extend geographical sales presence through dealer distribution model. Then it must be budgeted accordingly in the budgeting process of relevant functions. Thus, organisation’s vision framework, plans & budget shall be closely integrated for success of all.

Brain storming sessions are very important between all functional heads & top executives to set the tone at top for budget process. The brain storming sessions shall be directed to cover 1. what is required/ roadmap to achieve vision framework, 2. what are the best strategies to achieve vision framework both at organisation level & at functional level 3. what are the current business challenges 4. the financial history of last couple of years 5. capacity utilisation trends & capex opportunities 6. product development trends & new product opportunities and lot more exchange of thoughts between the team.

In the Brain storming sessions for 2021 budgeting process, finance function shall check the scenarios, assumptions and decisions that were taken or not during the COVID-19 crisis. This is very important, as different functions will have similar questions related to crisis response and recovery, resiliency and sustainability . All functions shall be aligned & brought on the same page during the brainstorming session. What did well & what didn’t during the COVID-19 crisis. What kind of scenarios could be possible during 2021. Each function can bring their own understanding to the table & brainstorm on the future possible scenarios & response plan in the budgeting exercise. Some organisations are relooking their M&A strategies and working afresh on acquisitions, joint ventures and spinning off along their supply chains. Those in more stable industries are considering new product launches and new technologies in the next normal. For example, a ceramic company is investing in digital distribution models to complement its traditional go-to-market approaches.

The above brainstorming sessions shall help to form guidelines for budget process. Each functional head can prepare a plan and budget for the concerned function based on the overall guidelines. While doing so, functional heads shall make sure to involve maximum team members for success.

Certain examples of strategies to be considered are as under-

Sales & Marketing

• Maximum drill down of forecast is essential. In-house / Outsourced. Domestic / Export. Vertical / Area / Sales Person / Product. Contribution / Basic Sales / Quantities. Each aspect will carry a specific strategy like which products will be manufactured inhouse and which shall be outsourced based on the margins & other criteria.
• Channel Partners / Human Resource Appointments shall be considered. Categorization of Channel Partners in exclusivity & non-exclusivity along with category specific sales parameters. Kind of human resources to be recruited could be a specific strategy.
• Correlate expenses with the forecast. Expenses under each head shall be worked out like branding, exhibition, sales promotion, salaries & incentives for team etc. This shall be based on strategies like which is more effective medium of advertising, which region/ territory is to be focused specifically.
• Consider Product Launch Plan by Research & Development. Newer product launches may have higher margin up to a certain period of time.
• Forward integration shall be considered.
• Pricing & discounts shall be strategized. This will formulate the kind of pricing strategies like Competition-Based Pricing, Cost-Plus Pricing, Skimming Pricing, Penetration Pricing etc.

Purchase

• Rate history shall be considered. Landed cost break up shall be worked out.
• Vendor development targets shall be fixed & built in budgeting. Share of volume by each vendor can be strategized.
• Annual rate contracts shall be considered for budgeting wherever applicable & possible.
• Backward integration shall be strategized.

R&D

• Product Roadmap can be the key strategy.
• Reengineering for existing product line shall be worked out.

Finance

• Working capital holding (Receivables / Inventory / Payables shall be worked out). Any optimization possible in capital structure shall be strategized & built in plan & budget.

HR

• Validated Resource Plan from each Department is required. Restructuring can be strategized. Like replacing certain high cost workforce with freshers to be trained by the organisation.

Production

• Present production capacity – optimum utilization can be strategized.
• Planned capex utilization shall be worked out separately with specific strategy.
• Strategy on product reengineering can be worked out to optimize the production cost.

Projects / Capex

• Correlate with company goals & vision. ROI validation required. Projects can be prioritized with specific strategy. This would be converted into capex budget.

Corporate

• Corporate level initiatives to be worked out. Like leadership training to all the top management executives can be strategized as a part of plan & budget process.
• In view of the current dynamics, the corporate function can create some central pool of funds (generally 10 to 15 percent of the total budgeted opex & capex) which can help the organisation to respond to uncertainties / set trigger points & grab the business opportunity at the right point of time in the next new normal.

The above pointers are just examples. Many more strategies can be designed during planning & budgeting process for execution during the year. These strategies will be integrated closely with budget numbers by each function & organisation as a whole.

One very important change to be brought in the regular budgeting exercise is the change of approach from historical base to zero base budgeting (ZBB). With this, organisation can understand well the business drivers afresh. This will take more time as it would require a detailed orientation on each of the budget elements & steps. Knowingly or unknowingly, many businesses have been doing it in this uncertain time. ZBB can really help to understand what minimum is needed to be in the business till the complete recovery is resumed. This can eliminate many inefficient spending both in opex / capex and help organisation be resilient.

After the brainstorming sessions are completed, plans & budgets of Sales & Marketing, R&D & Production shall be worked as first base. Rest of the functions shall prepare their plans & budgets considering the plans & budgets. Standard templates can be prepared to capture the information or it can be captured in the system with relevant customization.

In view of the current uncertain time, plans & budgets must be prepared on at least three scenarios- pessimist, realist & optimist.

While preparing annual budgets, all expenses are broken into two categories for better controls i.e. variable & fixed expenses.

All plans & budgets shall be validated by Finance / Corporate Planning (in some organisations) function. Some examples of validation criteria-

• Commercial feasibility like overall company adopted ROI criteria
• Working Notes/ Assumptions are very important. Must be kept in record by each Department & Finance/ Corporate Planning.
• All expenses shall be classified in Variable & Fixed Category. Base shall be defined for all expenses.
• Combination of History & Future, Forecast & Target shall be used for budget.
• Capex by each department shall be worked out in addition to the major capex by project function.
• Cross validation of each plan & budget with respect to connected function is a very important validation requirement.

• Cost optimization is very essential to be competitive. Competitor benchmarking strategy can be applied for validation of certain costs.

The above validation points are examples. These can be customized for the need of the organisation.

Make sure that the finance function is closely connected with most crucial areas of planning & budgeting by clearly defining actionable key performance indicators. In view of current turbulence, finance function must adopt the proactive approach instead of traditional reactive approach.

Once the inputs from Finance / Corporate Planning function is considered, plans & budgets are presented to top management in one to one session or in joint sessions. All key strategies, plans, budgets and critical success factors are reviewed by top management. Inputs are updated in the respective functions’ plans & budgets. Finance function / Corporate Planning acts as a driving force throughout the planning & budget processes.

Finalized plans & budgets are kept on record for implementation. Specific software like Oracle Netsuite, IBM Cognos or ERP Platforms can be leveraged upon for the planning & budgeting process.

Entire cycle right from Indenting of materials & services to payment can be covered in the software for better budget controls. Objective is to control all kind of expenditure right from the origin point & not just at the time of invoicing or payment. Master structure for system according to organisation’s requirements shall be designed including fund center, cost center, function wise budget owners for Budget creation, Budget release / transfer / supplement, Budget controlling & reporting. Proper authorisation structure for all budget transactions shall be designed & implemented in the ERP system.

In this turbulence, the businesses must rethink the decision making process connected to budgeting exercise just like any other strategic decisions as the decision making process really needs to be agile & speedier.

Budget Process – Monthly
Once the annual plans & budgets are set, they are converted into monthly plans, goals & budgets for execution. Many organizations prefer monthly dynamic plan based on which budgets are released every month in the system for consumption by the budget owners which becomes more important in view of current uncertain times. Plans & budgets vs actual achievements are compared, analyzed, monitored every month or quarter based on the requirement of the organisation. The analysis with corrective & preventive action plan on strategies & other aspects is presented to top management / steering committee. Inputs are considered & incorporated in the next periodic plan.

All expenses are broken into two categories for better controls i.e. variable & fixed expenses. If the volumes are higher than plan, variable expenses would be proportionately higher to that extent and hence variable expenses shall be controlled on per unit basis. Whereas, fixed expenses shall be controlled on absolute basis. Any deviation will be triggered for approval by management as defined in the system.

Few benefits

• A great tool for controlling and monitoring. The budgets set targets for costs and revenues, targets that can then be achieved through a variety of ways.
• Help to formulate the capital expenditureplans of the business. Facilitates the formulation of strategies for fund raising by outlining the available funding in advance.
• A great way to decide & execute priorities & strategies. Reviews the actual outcome & update the priorities & strategies in timely manner.
• Helps to control cost in a big way in a real time manner & brings cost competitiveness for the organisation in cut throat competition.
• Ultimately helps organisation to control the profit margins by controlling the revenue & expenses. Organisation can analyse the deviations & decides which function needs revamp / improvements.
• More important in view of current uncertain times

Critical Success Factors
An organisation has to keep following factors in mind while adopting budget process for successful implementation.

• Agility & speed in budget related processes & decisions
• Proactive participation of all functions & management
• Monthly Plan & Closure by all Departments – mostly the organizations have to adopt monthly cycle for implementing annual budgets. Closure of all month end activities on monthly basis in timely manner by all functions is very important success factor. Like completing invoice posting of sales transactions, completing purchase invoice booking etc.
• Timelines are essential for synchronization, as budget related activities are interdependent. Timely action on deviations can only be taken if timelines are adhered.
• System support is must for real time & preventive actions, as controlling through manual mode will be very challenging & ill-timed.
• Figures shall be supported by analysis. Only numbers will not help as numbers are outcome of the series of activities. KPIs of team shall be closely connected with budget activities & outcomes.
• Integration of all functions of the organisation is very critical. The organizations use ERP platform for that.
• Regular watch on budget by the owners & active participation by top management.

Many multinational organizations run on a very strict plan & budget process which helps their promoters to delegate day to day operations & lead the organisation in strategic way. Even large-scale Indian corporates have been implementing this & realizing the benefits. The emphasis shall be given to the budget process with the strategy formation & implementation as that will unlock the real benefits for the organisation. As the time goes & the organisation iterates this process regularly, properly and diligently, it will learn & find out more effective ways. Thus, it can be concluded that a planning & budgeting process are highly useful when accompanied with strategic purpose, implemented through technology /system & it could prove to be a competitive edge for mid-size businesses of certain scale to large diversified organizations.

The businesses must utilize their learnings to revamp the budgeting exercise for 2021, most significantly to focus on big decisions linked to business transformation strategies & re-aligning the focus to resilience and sustainability.