The Finance Leader Podcast

095: Leading the Annual Budget Development Process

August 23, 2022 Stephen McLain Season 11 Episode 5
The Finance Leader Podcast
095: Leading the Annual Budget Development Process
Show Notes Transcript

A successful budget development cycle begins with clearly communicated expectations and coherently executed leadership. You must partner with other leaders to minimize conflict, meet senior leader guidance, and deliver a budget plan that is on target and makes sense. Ensure you apply the strategy to the budget development process to prioritize and maximize the committed resources.

Episode outline:

  1. Link the budget requirements to the strategy,
  2. Communicate expectations early, clearly, and often,
  3. Ensure your budgeting tools meet your needs,
  4. Have a conflict resolution process in place, and
  5. Develop an effective partnership across the company.


Please connect with me on:

1. Instagram: stephen.mclain
2. Twitter: smclainiii
3. Facebook: stephenmclainconsultant
4. LinkedIn: stephenjmclainiii

Consider joining The Finance Leader Podcast Community Facebook Group, where we can talk leadership and the other topics I present here on the podcast. https://www.facebook.com/groups/financeleaderpodcast  This is a good time to jump in and start sharing ideas and thoughts about leadership so we can help each other.

For more resources, please visit stephenmclain.com. On the website, you can download the Leadership Growth Blueprint for Finance and Accounting Managers. You can use this guide to develop your leadership by focusing on communication, and growing and empowering your team.

You can now purchase a course to help you advance your career from financeleaderacademy.com. It's called Advance Your Finance and Accounting Career: Developing a Promotion Strategy that Sets You Apart.

Stephen McLain:

Do you look forward to your annual budget development process? Or do you want to run from it every year? A successful budget development cycle begins with clearly communicated expectations and coherently executed leadership. You must partner with other leaders to minimize conflict, meet senior leader guidance and deliver a budget plan that is on target and make sense and share you apply the strategy to the budget development process to prioritize and maximize the committed resources. Please enjoy the episode. Welcome to the finance leader podcast where leadership is bigger than the numbers. I am your host, Stephen McLean. This is the podcast for developing leaders in finance and accounting. Please consider following me on Twitter, Facebook, Instagram and LinkedIn. My usernames and the links are in this episode's show notes. And also, please join the Facebook group I have for this podcast community. Thank you. This is episode number 95. And I'll be talking about leading during the annual budget process, and I will highlight the following topics. Number one link the budget requirements to the Strategy number two, communicate expectations early clearly and often. Number three, ensure your budgeting tools meet your needs. Four have a conflict resolution process in place, and five develop an effective partnership across the company. Author Michael Porter said the essence of strategy is choosing what not to do. I am excited to talk about the topic this week. Because I spent many years in budgeting and resource management. It's work that is my heart and soul. A budget may seem like a list of items and funding amounts. But it is more than that a budget may seem restrictive, but it really isn't. A budget is about prioritizing Choices, choices about what you can do with the resources you have. A budget represents possibilities and opportunities within a strategic framework. It's a plan that helps your organization get a little closer to achieving its long term goal. And that is a very exciting. This week, I am talking about developing the annual budget which means a fight for limited resources where every department head wants and believes they need more money. A successful budget process requires clear and constant communication. begin communicating expectations early and teach and guide department heads plus those who will input the budget on what the guidance is in what to do to plan effective targets and requirements. If you are on an FPN a team, this is the time in the year that you get to endure conflicts more than ever, because it's about trying to meet a strategy within a set amount of resources. Depending upon your company's situation. Of course, any discussion of developing the budget must include a review of how strategy applies to this concept. We need a top level mission and vision for the business because we need to know what we are doing and where we are going. We need a SWOT analysis that is our strengths or weaknesses, or opportunities in our threats. And we need to know how the strategy is developed, which means how we are structured, what products and services we offer, what markets we compete in, what is our long term goal? And what resources do we have and how will these resources be prioritized? Though I do not want to get too technical in this discussion, we do need to talk about the basic methods of budgeting. One is the more traditional method, which is to use your current year's budget and last year's actuals. To use as a starting point. I do like to use last year's actuals since you will have an entire year's worth of data to pull. But for the current year, you may not know yet where you will land with a on target, or maybe slightly above or below, but current year must be considered too, you should be able to pull actuals and maybe variances for possibly two to three quarters, depending on where you begin. The other common method is zero based budgeting where we of course start from zero. The benefit of that will be more accurate budget that is based on strategic requirements. You build and align every dollar starting at zero and matched to this year's goals. To be effective a zero based budget must have a thorough review and analysis of the prior year's execution. The new budget will be based on specific goals, targets and anything that needs to be improved. This method may be more time consuming because it will require more analysis, discussion and leadership to arrive at the appropriate resourcing levels in each category and line item. We always desire to get everything we want in the budget But we have to prioritize and maximize what we have to achieve the targets within our strategic plan. Budgeting many times involves trades or offsets, meaning if someone wants to increase the budget in one area, then you must find a bill payer in another area. So the net effect is zero to the overall budget. This requires communication, and leadership to make all parties happy, you may need to commit future funds to make up for cuts in the upcoming budget. And effective process begins and ends with open and constant communication. The CFO should be issuing budget guidance with targets and also be discussing the upcoming goals and priorities and where we expect our budget planning to land as it relates to the comparison to the year of execution. What are the priorities for next year? What projects are we adding? Which ones are we dropping? And where will we be going in the next three to five years. This should translate into how each department's budget should look like. So make sure we issue specific guidance to each budget holder on where their budget should align to. Also the annual budget process will always involve conflict. How do you work through this conflict? A budget represents choices and priorities, and not everyone will be happy. That's why I mentioned communication is so important. Each department head or budget account holder has to prioritize their own budget, and also meet the budget guidance and targets issued by the CFO. But how do you resolve this? I will talk more about this later. I have been through many budget cycles. It begins with a plan. Where do we want to go? And how should we use the resources we have to get there? We don't have unlimited resources. So we need to prioritize? What do we look like now in terms of capability our offers and how we meet the needs of our customers? How do we create value within that framework? Now let's talk about using leadership during the annual budget process. Number one, link the budget requirements to the strategy. A direct product of strategy development is a budget to show where we will commit our resources. We can't fund everything unless you somehow have unlimited resources, which is very unrealistic. So we have to make choices and then prioritize them. We must prioritize our projects in our efforts to where will we commit our dollars, our time our facilities and equipment and our team. How we do this will result in success, failure or just everyday mediocrity. Your budget must have some meaning behind it. Every line item in your budget should contribute to the strategy and to creating value. Your requirements should fit the priorities of the organization. We also need to anticipate what may be necessary to ready ourselves for something in the future. A budget will always represent possibilities, how can we maximize our resources to create something great, and that is why I love budgets. It's the possibilities of what you can do when you prioritize what you have. Number two, communicate expectations early clearly. And often. A key component of the budget process is to communicate expectations. And do this often and not just in the budget process. But with every action we move forward on and every task we undertake. While you are developing the budget and budget holders are submitting their line items. Do a review and ask the team to review for anything that doesn't quite make sense or doesn't meet guidance. Have the conversation if necessary to align with the expectations and make the changes. Be involved in the process. Do the reviews in the middle of the process too. And give updates across leadership to continue to align what is expected to what is being produced. This is leadership, we are trying to align expectations with the needs of the organization. Number three and share your budgeting tools meet your needs. I have a few quick thoughts about your budget tools. There are many budgeting tools commercially available I have used many of them. Your budgeting tools must be easy to use, and be flexible, be visual, if possible, and provide insights such as variances that may be out of tolerance. Your tool should not create more work to navigate. Ask those who use it to critique it. We want something powerful but not cumbersome and difficult to use. Number four have a conflict resolution process in place. What happens when a budget request doesn't align with expectations or an account holder insists on committing funds? That does not make sense in the next year? Well, first we need to figure out why. So we have a conversation and then try to find some common ground. We do often have to spend money for something in the future that may not initially line up with the present priorities of the organization. This happens often. I would hope that conversation would occur at the senior level, depending upon the magnitude of the request. Small amounts are not a worry, but if we are looking at committing a significant amount of resources on a project that is not approved yet, then we need to figure out a compromise and make note of it. I always believe in getting buy in very early and to not have surprises as we are developing next year's budget. If we do decide to move forward, we may need to find an offset somewhere maybe even in the requesters budget, or we need to develop a longer plan of execution to spread out the project. This may involve senior leaders to decide having expectations and communicating them often is critical to a smooth budget development process, have the mid process reviews and call out out of tolerance variances. Number five develop an effective partnership across the company. The annual budget process requires effective leadership and communication. I will always advocate for partnering with leaders across the organization. Some people avoid this because they feel it may be more difficult to say no. When you get close to people so they avoid the unnecessary discussions. I feel the opposite is true. Because we can create opportunities to shape the future and achieve the vision and strategy together. Leadership is about creating an influencing more positive outcomes. The more conversations you have about these topics, the more barriers you break down, the more communication you have. You figure out where people are motivated and how you can help them achieve their goals. And they can help you achieve yours a win win solution and culture. Let's not get stuck in department silos, expand your network and expand your reach to influence those positive outcomes. Now for action today, how does your organization develop its annual budget? Do you use a more traditional method or maybe a zero based budget? No matter which method I do recommend that you set expectations early. If you have a role in the development process, communicate early and often and ensure there are no surprises and work across the company. So you have a method to work out conflicts, the budget process can become a daily fight for future resources. So be ready to exercise leadership to arrive at a budget that makes sense regarding strategy and for creating value. Don't forget to grab my free guide for you called the leadership growth blueprint for finance and accounting managers. Are you a finance or accounting professional who is also leading people, but have questions about how to lead more effectively. I know you are expected to be the technical expert in our field. Learning leadership can set you apart from your peers, which can then lead you to more opportunities. In the free guide I talked about three leadership areas communication, team development and empowerment. Plus a few recommendations around challenges with the financial systems you are using to complete your work. The link to this free guide is in the post or the bio. You can also go to Finance leader academy.com. To download it. Please use the guide to help you with a few leadership wins today. Thank you. So today I talked about using leadership during the annual budget process and I highlighted the following points. Number one link the budget requirements to the Strategy number two, communicate expectations early, clearly and often. Number three, ensure your budgeting tools meet your needs. Number four have a conflict resolution process in place, and five develop an effective partnership across the company. Our annual budget process requires a leadership perspective and emphasis. You must lead during the annual exercise to ensure that the final budget matches the priorities and guidance of the senior leadership and will help deliver the strategy and create value. Budgets represent possibilities. We are committing resources to our vision, our goals and our strategy. Well this episode wraps up season 11. It was a short season, which I expect to be doing each summer going forward. Because this gives me an opportunity to focus better on delivering topics and the three longer seasons which are at the beginning of the year, the spring, and then the fall right before the holiday season begins. I really enjoyed this shorter summer podcast season where I applied leadership to a few more technical topics. I am planning to do the same next summer too. In the upcoming fall podcast season which will begin September 27. I plan to talk about productivity tips, the benefits of life coaching more on strategy and budgeting and using LinkedIn to just highlight a few I can't wait to share. Please continue to develop your leadership and to create value. When you combine these two areas you will make a difference which will translate into career opportunities. I hope you enjoyed the finance leader podcast I am dedicated to helping you grow your leadership skills you To change your mindset and to clarify your goals so you advance your career. You can find this episode wherever you listen to podcasts. If this episode helps you today, please share and leave a quick review so that others may find a podcast. Until next time, you can check out more resources and finance leader academy.com and sign up for my weekly updates so you don't miss an episode of the podcast. And now Gallade your team and I'll see you next time. Thank you