How your business can apply more intelligence to the budgeting process
Over recent months there have been several articles written on the topic of Finance and Procurement coming together for the greater good. Following on from this theme, this post looks at what value Procurement can bring to the overall budgeting process.
From a Finance perspective, effective budgeting requires historical/current data and future projections, combined with knowledge and insights to draw out trends and highlight performance gaps. Often those departmental leaders who paint a rosier picture of the future (usually those closely related to revenue growth activities) or deal with highly complex ‘specialist areas’ (think IT / Marketing) will tend to receive more (if not all) of their budget requests, whilst those unable to articulate their requirements effectively will not. And articulating a highly complex business need or plan to a non-expert, in areas such as IT or Marketing, is not easy. Why do you think IT often is a great unknown that receives large budgets with little accountability?
Additionally, when the top line is not growing as fast as it has in the past, the overall budget pot inevitably becomes stretched. As such, during the budgeting process our friends in Finance have to use the blunt instrument of slashing budget requests through rough analysis and gut-feel. This is by no means meant to be a negative reflection on Finance’s approach to budgeting. However, Finance faces the difficult challenge of scrutinising and challenging the various buckets of spend, each with complex and intelligent rationales sitting behind them, when Finance itself is not an expert in each of the particular fields or departments requesting budget. So how can they do this? How can they offer informed commercial challenge? How can they cut through the ‘bull’ that department heads add onto certain spend areas?
Why not involve the people who understand how much things cost and are able to impact change across the organisations? That is - Procurement.
Now, before you begin to cynically scoff, there is a requirement that Procurement has some grasp on both business and department objectives (ideally with some level of amicable relationship at the department level already underway). With this as a base, there are two alternative methods for approaching the budgeting process:
- Finance continues to apply the tried and trusted blunt instrument to each budget BUT rather than leave the department Head feeling slightly perturbed and frustrated that they now have to achieve the same objective with less cash behind them, setup a forum in which Procurement and the department Head discuss how the two teams can drive better efficiencies out of the reduced budget from the external supply market.
- The budgeting cycle begins earlier – at least for the departments. Under Finance’s directive, the Procurement team works alongside each of the departments (similar to a Finance partner – however the Procurement partner focuses externally on the supply market) to build up the budget based on current information together (taking into account various cost ranges along the way). The department Head is then able to take more accurate and current figures back to the budget meeting – with a range of options for fluctuating spend up or down depending on the final budget figure.
So the budget process and mid-year budget cuts need not be a painful process. Indeed, it can be the catalyst to improve communication, cross-functional working, innovation and work towards a culture of better commercial rigour.
This is another of the ways that Procurement needs to be powering the business – but Procurement has a journey to go on in most businesses before this type of benefit can become the norm.
Do you think either of the above approaches could work in your business?
If not already, what does Procurement need to improve to make this a reality?