The CFO’s four tips for Budgeting and Forecasting in groups

Budgeting and forecasting are a must on the group finance team’s annual schedule. But whether you do it annually or monthly, top-down or bottom-up – there are some basic “best practices” you want to do to futureproof your company’s finances.

Budgeting is properly the most essential ‘project plan’ in finance for the upcoming year, and you do not want the project’ company revenue’ to fail because of bad planning. At Konsolidator, we talk with many CFOs, so besides our financial knowledge, we collect much insight after more than 1000 meetings with Group CFOs and finance teams. Read this article to learn the four main tips we have collected for the risk-conscious and strategic Group Finance team.

In this article, we will cover:

  • Budgeting and Forecasting in Groups – The current risk
  • 4 tips for budgeting and forecasting in groups
    • Tip 1: Include the Balance Sheet
    • Tip 2: Include your Cash Flow
    • Tip 3: Understand the dependencies across the business and Departments
    • Tip 4: Keep yourself updated
  • Understanding your Business – from a finance point of view

Budgeting and forecasting in groups – the current risk

The main challenges we see across groups do not happen in the ‘doing of the budget’ phase but in the data being incorporated into the budget. In creating the group’s budget, we often see over-reliance on historical data or collecting data from subsidiaries and departments by simply asking them to send their budgets. And by just copying and pasting their data into a larger budget, the finance team does not get the chance to do what they do best –understanding and analyzing the numbers. As with everything else, there is always a reason for cutting corners. The most mentioned reasons are lack of time and group complexity – especially in groups with subsidiaries in various countries – which may be due to a lack of resources. However, where we believe it will save time, it can bring a relatively large number of risks if the numbers are inaccurate.

An essential part of budgeting and forecasting in groups is to account for potential risks and accommodate them – simply put, it involves making as accurate as possible estimates about the future. Certain items will always deviate from the originally predicted costs. Still, if we can minimize unexpected costs elsewhere, set achievable goals, and prioritize spending, we can improve the company’s reputation and shareholder confidence and stay financially healthy. To do this leads us to the most crucial advice and what will shape the following four tips, namely:

“You need to understand your entire business and the current state of the markets.” 

4 tips for budgeting and forecasting in groups

In general, there are many pieces of advice on how you best do budgeting and forecasting, but if we should cut it down to only 4 specific tips, as the most essential, it is these:

      1. Include the balance sheet
      2. Include your cash flow
      3. Understand the dependencies
      4. Keep yourself updated

Below we have tried to put a bit more words on every single one of these and why they are so important. But what they have in common is this: you need to understand the complete business and not just part of it.


Include the balance sheet

As your balance sheet is a snapshot of your company’s assets, liabilities, and shareholder’s equity, it is essential to start there and not in the Profit/Loss as too many do. When companies are too focused on Profit/Loss, they forget/overlook the balance. Where your profit/loss shows your earnings and losses, it will not give you the foundation you need to create a sufficient budget. If we look at it as a house, your balance sheet is the foundation, and the profit/loss is the interior. One does not go without the other, but you cannot start to install furniture if the foundation doesn’t exist or has holes in it. 

Therefore, before starting your budget, it can be a good idea to clean up your balance sheet and ensure that old assets are removed. Furthermore, errors in your balance increase the chance of errors in your profit/loss statement. Looking at the balance will help your company to plan for the following year’s spending. However, your balance sheet is a snapshot and does not show your cash movements during the year. This leads us to the next tip, and the one too many groups dread the cash flow.


Include Your Cash Flow

Your cash flow tells you what you have available in your account at this very moment and is your eyes on the money floating in and out of your group and subsidiaries. It is one of the most critical indicators of a business’s performance – as it states your liquidity. Here you can see if you have had nearly no earnings one month or significant project spending in specific departments. Additionally, it provides the insight that your finance team needs to quickly determine, for example, why, where, and when your debitors are increasing and fix this in the coming budget. 

The challenge is that too many companies are not doing a regular cash flow, which will have to be initiated before budgeting and forecasting. So you can revise it, ongoingly. If you need an incitement to begin, know that one of the most prominent reasons for companies to go bankrupt stems from not doing a proper cash flow.  Furthermore, both balance sheet and cash flow are part of your reporting where you can automate most of the process of collecting data.


Understand the dependencies across the business and departments

As soon as you have the balance and cash flow, preferably automated, you can start to embrace a more thorough business understanding – from a finance point of view. There is an ongoing change in the role of the CFO, which goes hand in hand with more automated processes. And contrary to some beliefs, it doesn’t mean they move away from being number crunchers – just in a different way than before.

Technology makes it possible to help with problems we before had to do manually, bringing an opportunity for us in finance to handle the more complex issues that technology can’t address. How your business work together and the relationship among activities is not something you can’t just see from the numbers delivered. Instead of getting subsidiaries to send you their budgets – look at the cash flow and ask questions. If you automate the data collection process, you will free time up to actually analyze and create streamlined budgets across the group, minimizing the risk of unexpected costs. Even better if you also start to include KPIs in the budgeting, and start looking into Finance Business Partnering.


Keep yourself updated

If there is one thing we cannot underline enough, it is to: get a hold of the economic insight that can help you navigate in your different markets, like the local development of inflation. And here, many banks and other research centers worldwide, like Mckinsey have already done most of the work. And can guide you as they create trend analyses for e.g. micro budgeting and employee-driven companies, as well as predictions and insight into spending and local inflation development.

With inflation rising to new heights, this information can be critical in preparing for the next year, especially in countries where you do not sit. If you can already create room for this information in the budget, well, how can that not only benefit you?

In this tip also lies the beforementioned statement: “do not overly rely on historic and copied data”. You risk being removed from the ‘current’ state and themes in the markets. Look at the inflation, if you rely on historic data, you won’t incorporate elements that are very specific for the effect the inflation has on the coming year. You might have to save on certain areas you didn’t have to before.

Understanding your business – from a finance point of view

Understanding your entire business from a finance point of view is not about how you do it or that you go away from your area of expertise. Instead, it is ensuring that you prepare your company for the best possible and realistic outcome – in the future. And this is not done by copying and pasting last year’s budget – but by understanding where the numbers originate, why there is an increase, or where to decrease spending. For example, if you know your electricity will rise by 200 %, you need to find that money elsewhere. If you know your cash flow, you can see where the money is going in and out during the year – and if you also know the underlying dependencies, you will also be able to see why. And that why is what helps your team when planning for the following year. 

So before beginning your budgeting and forecasting in groups finance teams, our recommendation is to start going all the way back to the essentials – your data collection. You can also start by reading more about how to standardize your reporting and get control of your data flow.