{"id":22713,"date":"2024-06-17T16:03:14","date_gmt":"2024-06-17T10:33:14","guid":{"rendered":"https:\/\/open.money\/blog\/?p=22713"},"modified":"2024-07-05T16:08:36","modified_gmt":"2024-07-05T10:38:36","slug":"how-is-budgeting-mechanism-evolving-for-cfos","status":"publish","type":"post","link":"https:\/\/open.money\/blog\/how-is-budgeting-mechanism-evolving-for-cfos\/","title":{"rendered":"How Are CFOs Revolutionizing The Budgeting Mechanism: The Ultimate Guide"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">CFOs today direct their organization&#8217;s growth strategy rather than just focusing their efforts on managing financial and risk management.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">They are expected to be strategic partners to the CEO in business planning, write down the financial roadmap, communicate a clear financial picture of the stakeholders, and collaborate with CIOs to protect proprietary financial data. The financial roadmap ultimately guides the strategies for market expansion, acquisitions, organic growth, and new product initiatives.\u00a0<\/span><\/p>\n<h1><strong>The changing role of CFOs in the digital age<\/strong><\/h1>\n<p><span style=\"font-weight: 400;\">In all this, especially business planning and budgeting, the primary role of CFO is to be agile, forward-looking, and adaptive to new technologies. Deloitte findings reveal that <\/span><a href=\"https:\/\/www.oliverwyman.com\/our-expertise\/insights\/2021\/feb\/financial-planning-and-analysis.html\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">75% of CFOs<\/span><\/a><span style=\"font-weight: 400;\"> believe that agile financial planning is essential for business success.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Budgeting has seen maximum transformation over the years as a methodology and practice. The role of CFOs is increasingly getting focused on opting for agile financial planning methodologies and automation via <\/span><a href=\"https:\/\/open.money\/blog\/mastering-invoice-automation-the-key-to-streamlined-ap-operations\/\"><span style=\"font-weight: 400;\">accounts payable automation<\/span><\/a><span style=\"font-weight: 400;\"> and other finance reporting solutions to enable accurate forecasting and collaboration across teams.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">CFOs are also adapting to the latest technologies, such as AI and ML, automation, etc., to enhance flexibility, responsiveness, alignment with business objectives, and changing market conditions.<\/span><\/p>\n<p><a href=\"https:\/\/www.bcg.com\/publications\/2019\/power-of-algorithmic-forecasting\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Daimler Mobility<\/span><\/a><span style=\"font-weight: 400;\"> built a forecasting engine to automate high-quality forecasting on a monthly basis. CFOs and top management allow the overwriting of these algorithmic forecasts so that the budget incorporates the information the forecasting engine couldn\u2019t accommodate. This process at Daimler Mobility keeps budgeting agile, tech-driven, and forward-looking.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While the objective of budgeting hasn\u2019t dramatically shifted, the context in which a budget exists has changed dramatically. Let\u2019s discuss the evolution of budgeting and how technology interlaced with modern budgeting approaches has made CFOs into strategic partners today.\u00a0<\/span><\/p>\n<h2><strong>The limitations of traditional budgeting methods<\/strong><\/h2>\n<p><span style=\"font-weight: 400;\">If we delve a bit into the history of budgeting in business, budgets were always meant to \u2018manage expectations.\u2019 An organizational budget would be about the specific allocation of scarce resources during a particular financial year and cover a few key aspects, such as:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The kind of resources\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Deployment of these resources\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The users and usages of these resources<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Controlling and measuring parameters<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">CFOs earlier were relentlessly trying to square a circle when it came to budgeting, while the budgeting process itself was an attempt to meet entirely incompatible objectives. Also, traditional budgets were rigid and inflexible.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">BCG Consulting explains the trilemma that traditional budgets face:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Target setting<\/b><span style=\"font-weight: 400;\">: Finance teams set targets to motivate and encourage employees to perform. This function requires directional and stretch goals.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Forecasting<\/b><span style=\"font-weight: 400;\">: Budgeting provides forecasts of future developments. However, these forecasts work only when they are realistic and unbiased. A good example of this could be the expected sales target for the production department, which would work better than the stretch targets the sales department attempts to meet.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Resource allocation:<\/b><span style=\"font-weight: 400;\"> The C-suite allocates resources to the most value-creating opportunities. However, the management is always there to set boundaries around spending and intervene to control costs.\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Traditional budgeting has conflicting objectives that will always clash and make achieving goals impossible. Also, a company\u2019s operations never run in watertight timeframes. For instance, some<\/span><span style=\"font-weight: 400;\"> accounts payable<\/span><span style=\"font-weight: 400;\"> invoices will carry forward to the next FY, while others may become an NPA. A 12-month period may prove too long or too short, depending on the type of goals the management wants to achieve.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">BCG enlists some <\/span><a href=\"https:\/\/www.bcg.com\/publications\/2020\/budgeting-in-an-age-of-uncertainty\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">disadvantages<\/span><\/a><span style=\"font-weight: 400;\"> that accompany traditional budgeting:\u00a0<\/span><\/p>\n<p><i><span style=\"font-weight: 400;\">\u201cThe traditional budgeting process leads to a long list of problems and challenges, ranging from the significant cost and effort required to create the budget to counterproductive motivations, unrealistic targets, gaming, and year-end spending fever.\u201d<\/span><\/i><\/p>\n<h2><strong>Emerging budgeting techniques and their advantages<\/strong><\/h2>\n<p><span style=\"font-weight: 400;\">Today, the CFO\u2019s expectations around budgeting outcomes have evolved. CFOs recognize that \u2018short-term goals must lead to achieving long-term strategic goals that increase shareholder value\u2019 for<\/span><a href=\"https:\/\/www.linkedin.com\/pulse\/mastering-ap-ar-automation-secrets-boosting-efficiency-your-ee70c\/?trackingId=01dHjgNhIa21AuaUDjQEZg%3D%3D\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\"> achieving efficiency in their accounts payable and receivable processes.<\/span><\/a><span style=\"font-weight: 400;\">\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">CFOs realize the need for organizational nimbleness, translating into budgeting techniques that involve constant revisits and updates relative to changing business conditions. Some of these emerging business techniques are as follows:\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Rolling forecasts<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Rolling forecasts is a budgeting technique involving continuous planning, unlike static budgeting.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A static budget, like an annual or quarterly budget, sets out the entire spending cycle for a company&#8217;s teams and departments in advance for a set time period. However, a static budget has an obvious flaw. It\u2019s too rigid to accommodate all financial events and their impact on a company within that set time frame.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Rolling forecasts also work on a set time frame but without an end date. A typical 12-month rolling forecast is updated quarterly or monthly. This ensures you always have a plan in hand for the upcoming 12 months whenever you look at the budget.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Rolling forecasts allow real-time decision-making and planning outcomes based on actual results rather than future performance.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Energy company Equinor switched to dynamic forecasting around a few time zones. The finance team creates new forecasts when circumstances change, and a common forecasting database for<\/span> <b>accounts payable<\/b> <span style=\"font-weight: 400;\">and receivables enables a companywide forecast.\u00a0<\/span><\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/BwMNH3B-l7c?si=uaUsmzJQ_oz0AEDS\" width=\"560\" height=\"314\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<h3><span style=\"font-weight: 400;\">Zero-based budgeting (ZBB)<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Zero-based budgeting, or ZBB, involves beginning afresh from scratch with a new budget instead of adjusting the previous budget.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Under ZBB, every function is analyzed to determine the needs and costs for the upcoming period. This helps teams to align their needs with expected returns.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">ZBB is great for organizations working to eliminate inefficiencies accumulated from previous budgets and revamp their existing cost structure based on actual business needs.\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Driver-based budgeting<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">True to its name, driver-based budgeting, or DBB, focuses on key business drivers. DBB involves identifying the activities or primary factors that ultimately influence an organization\u2019s financial performance and developing a budget based on them.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">DBB is advantageous because it helps link financial projections and costs to operational drivers such as the customer base, number of units being produced, sales volume, etc. DBB establishes the cost-and-effect relationship between outcomes and operations.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">DBB is great for rapidly evolving industries and organizations that rely heavily on operational efficiency and must monitor their KPIs. Given its agility, DBB is a preferred budgeting technique for many CFOs.\u00a0<\/span><\/p>\n<h2><strong>The impact of advanced technologies on budgeting\u00a0<\/strong><\/h2>\n<p><span style=\"font-weight: 400;\">Financial planning involves handling large amounts of data, which can be difficult to manage. Also, at the speed at which business conditions change, it is difficult for finance professionals to balance long-term and short-term strategies. That\u2019s where <\/span><a href=\"https:\/\/open.money\/blog\/navigating-the-future-of-financial-operations-how-cfos-can-harness-technology-for-sustainable-success\/\"><span style=\"font-weight: 400;\">technologies like AI, ML, and predictive analysis help<\/span><\/a><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Here are a few ways technology can help CFOs in budgeting and financial planning:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">To automate repetitive tasks, such as data entry and reconciliation, freeing up more time for strategic decision-making\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">To automate data capture, aggregation, and analysis for informed decision-making<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">To develop comprehensive financial forecasts and models that can help CFOs to identify potential risks and opportunities.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">\u00a0To facilitate communication and collaboration for real-time updates and information sharing<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">To integrate accounting and ERP systems, such as<\/span><span style=\"font-weight: 400;\"> accounts payable<\/span><span style=\"font-weight: 400;\"> and receivables, to ensure that the CFOs remain up-to-date<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">To provide real-time reporting and analytics to help CFOs make decisions based on real-time information and analysis.\u00a0<\/span><\/li>\n<\/ul>\n<h2><strong>Strategies for CFOs to lead the transition to modern budgeting practices<\/strong><\/h2>\n<p><span style=\"font-weight: 400;\">The financial landscape continues to be disrupted by new-age tech solutions and automation software like<\/span><span style=\"font-weight: 400;\"> accounts payable automation<\/span><span style=\"font-weight: 400;\"> solutions from<\/span><a href=\"http:\/\/open.money\"><span style=\"font-weight: 400;\"> OPEN<\/span><\/a><span style=\"font-weight: 400;\">. There\u2019s an even greater need for CFOs to lead the transformation of the financial function to keep up with the changing market conditions.\u00a0<\/span><\/p>\n<p><a href=\"https:\/\/www.youtube.com\/watch?v=67NZNMFHe68\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">CFOs use AI and analytics tools to gain deeper insights<\/span><\/a><span style=\"font-weight: 400;\"> into cost and profitability, align performance with business strategy, and manage more accurate forecasts. These AI tools can help CFOs better understand the relationship between KPIs and actual performance. However, CFOs can also apply certain strategies to better implement these SaaS-based solutions within the organization&#8217;s internal structure and processes.\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A CFO must ensure that all the people who need access to these systems have been onboarded well.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">They should standardize all accounting, financial reporting, and operational templates and create a reporting calendar for the finance team to provide real-time analysis and leverage information to improve company-wide processes.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">CFOs must use the reports and analytics obtained from the tools to gain strategic insights into processes for improving financial and operational performance and standardizing databases.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Take a proactive approach to address the issues and enable smooth AI and analytics tools integration into the internal systems.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Encourage the development of cross-functional teams and healthy communication between them for a holistic understanding of how each functional area operates, which functional area contributes to the maximum profits, and to maximize financial performance.\u00a0<\/span><\/li>\n<\/ul>\n<h2><strong>Adopting budgeting evolution for long-term financial agility and success<\/strong><\/h2>\n<p><span style=\"font-weight: 400;\">With rapid technological innovations and a fast-paced business environment, CFOs are increasingly finding a year-long budget period too long to accommodate all ad hoc events and business volatility.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The budget needs to reflect an adequate time zone. CFOs need to be nimble and use the latest data management tools so that no information remains unanalyzed or unaddressed. Budgets will continue to play an important role in shaping business perspectives and priorities, but they must be combined with forecasting and automation software for quick decision-making, risk mitigation, and ensuring long-term goals are met.<\/span><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"CFOs today direct their organization&#8217;s growth strategy rather than just focusing their efforts on managing financial and risk&hellip;","protected":false},"author":49,"featured_media":22724,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"csco_singular_sidebar":"","csco_page_header_type":"","csco_page_load_nextpost":"","footnotes":""},"categories":[267,501],"tags":[502],"class_list":{"0":"post-22713","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business-finance","8":"category-connected-finance","9":"tag-connected-finance","10":"cs-entry"},"_links":{"self":[{"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/posts\/22713","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/users\/49"}],"replies":[{"embeddable":true,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/comments?post=22713"}],"version-history":[{"count":9,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/posts\/22713\/revisions"}],"predecessor-version":[{"id":22725,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/posts\/22713\/revisions\/22725"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/media\/22724"}],"wp:attachment":[{"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/media?parent=22713"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/categories?post=22713"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/open.money\/blog\/wp-json\/wp\/v2\/tags?post=22713"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}