A CFO's Guide to Effective Annual Budget Planning and Management

A CFO’s work is never done—especially when it comes to maintaining their organization’s financial health and continued success.  

One of the key components of a healthy bottom line is having an accurate annual budget. This comes down to careful planning and management on the part of the CFO. The impact of a well-planned budget can’t be underestimated; it allows businesses to plan out expenses, reach important goals, and anticipate operational changes. Without a meticulous plan in place, businesses may experience overspending and underperformance—things a CFO strives to avoid.  

This blog will serve as a CFO’s guide to effective budget planning and management, with helpful tips and tricks for keeping your business’s crucial finances and funds on track. 

How a CFO Plans a Budget 

CFOs are usually well-versed in all things financial, especially budget planning. However, it doesn’t hurt to take a high-level, step-by-step approach to what makes a successful budget tick.  

What Kind of Budget is Right for Your Business? 

To begin with, most budgets fall under two main categories: top-down or bottom-up budgeting.  

• Top-down Budgeting: In the corporate world, this is the more common approach. The CFO or leadership team sets goals and budgets for the business at large, based on company goals and objectives. This determines where and how much of the business’s financial resources are allocated among various departments and teams for the upcoming year. This distribution is usually determined by the previous year’s budget and each team’s performance metrics. Once set, the departments and teams need to figure out how to reach their goals with the budget in mind. 

• Bottom-up Budgeting: Inversely, bottom-up budgeting begins at the department or team level before climbing the ladder to the C-suite. The budget grows as it progresses, finally reaching company management where it is consolidated into an agreed-upon overall budget. Instead of defining revenues and costs from the top, the core drivers of the business are planned, which is then reflected in the final shape of the budget itself. 

Both kinds of budgeting have pros and cons, and it’s often up to a CFO to determine which one is the better fit for their unique organization. Once selected, you can begin planning your budget with the parameters of either top-down or bottom-up budgeting in mind.  

Budget Planning That Works 

As previously mentioned, planning an accurate and successful budget is among a CFO’s top priorities. With this in mind, there are a few steps any CFO, from the newly promoted to the 25-year veteran, can take to make this goal a reality.  

Hopes and dreams do not a budget make. The first step of budget planning is identifying and locking down your main company goals. Is this a year of expansion? Is your organization adding new employees or a new location? Or has last year’s budget been inaccurate, resulting in restructuring to keep the company afloat? 

These goals dictate your company’s budget. Whether it’s just you, the CFO, or an entire financial team involved in the planning, understanding and accepting these goals is paramount.  

Once you’ve established the goals you need a well-thought-out budget for, it’s time to take a look at your understanding of the business as a whole. True comprehension goes beyond knowing what industry the organization operates in, how it makes money, and how much revenue it’s bringing in.  

This granular look means you need to be able to answer questions like:  

• How many orders will we have if we increase our market spin by 15%? 

• Will a change in our pricing structure negatively affect long-term, loyal clients? 

• What share of our profits is going to each department? Are there any that are underfunded? Overfunded? 

• What share of new users do we expect to churn after 3, 6, and 12 months? 

While these questions may vary depending on your company’s size, industry, or target market, the point of them remains the same: you can’t plan a budget accurately with a shallow understanding of the organization at large.  

While the CFO may be the main decision-maker and leader when it comes to budget planning, there are likely knowledgeable wells of information scattered throughout the organization.  

For example, the Marketing department is best positioned to calculate the potential ROI on a new marketing campaign, or a referral program being leveraged to bring in new customers while rewarding long-term clients. The HR department will have insight into recruitment costs, employee salary requirements, and compliance training fees. 

A more inclusive budgeting process will help you establish a more accurate picture of each department’s needs and goals while staying aligned with the organization’s previously established targets.  

Budgeting can be a time-consuming process—and one that often needs revisions as a quarter or year goes on. Building in lead-time into your budgeting process can help your organization avoid costly mistakes and inaccurate financial planning.  

How a CFO Manages a Budget 

Congratulations: you’ve planned your budget! However, as mentioned in the previous section, a budget is oftentimes a living document, subject to changes caused by both internal and external forces.  

While there’s no one perfect way to manage a budget, there are several steps you can take to ensure sufficient monitoring to keep both you and your team aware of any changes that need to be made.  

Leverage Automation and Other Modern Financial Tools 

Using Excel sheets and paper files for budget management is so 2014. For modern organizations to succeed, many are turning to solutions that give them more accurate insight into their important back-office processes, which in turn transforms into more precise data to plan and manage a budget around. AP and payment automation solutions, for example, work not only to alleviate common headaches that many finance departments experience (tedious manual data entry, invoice management, approval routing, etc.) but also serve as a digitized library of financial trends for an organization.  

With an automation solution, your business will experience streamlined processes, boosting your financial accuracy, and leveraging those valuable data points for continuous budget management.  

For a deeper look at how your organization can save time and money by going paperless via automation, check out our other blog: How CFOs Can Save Money By Going Paperless. 

If you or your organization is looking for an automation solution that can drive enhanced financial performance, provide more accurate insight into your ROI and bottom line, and transform your budget planning and management, schedule a demo with DocuPhase today!