So much of corporate financial planning is about making room for liabilities while still freeing up funds to advance the business forward. Unfortunately, operating under outdated and inefficient budgeting principles, CFOs often find their firms stuck in neutral. To stay ahead of the corporate curve, a business and those who lead it must keep an agile mindset at all times. Increasingly, organizations large and small are turning to software and processes that would have seemed improbable only a few years ago.
“Optimized budget practices could generate 17 percent more growth.”
Time and again, research has shown that an inflexible budget or financial model cripples companies, particularly SMBs. A survey of finance department leaders by advisory firm CEB asked respondents to estimate how much growth went unrealized at their companies due to poor budgeting. Altogether, survey participants figured they could achieve about 17 percent higher revenue and profit growth if their budget practices were optimized.
However, the CEB study also found that most of these businesses relied on overly rigid models and budgeting practices. Using only one or two standard methods for tracking and analyzing financial data leads to a bottleneck at all levels of an organization. But when finance teams have the tools and strategies to enable a less rigid budgeting approach, they become confident in their spending decisions and capable of reaching deep levels of strategic insight.
CEB’s study found that finance departments always strive for that level of confidence, but typically aren’t achieving it. Only 35 percent of respondents felt confident they could provide executives with up-to-date expense information across all lines of business. And just 13 percent said executives would even be able to fully understand this data, likely because collecting and analyzing it using overly-rigid methods is rarely intuitive.
How to enable budget performance
So why aren’t finance teams and the CFOs leading them capable of agility? Chances are, it’s not for lack of trying or a dearth of talent. By taking a look at companies that have broken out of an inflexible budgeting and planning process, it’s clear that the key lies in developing a forward-looking approach.
In an article for CFO.com, David Katz spoke with companies that are constantly innovating and improving through the use of adaptable financial models. Katz found that generally, the traditional approach to budgeting is too focused on looking in the rearview mirror. On the other hand, he learned that the organizations realizing the most growth were the ones who could pivot at a moment’s notice.
Increasingly, Katz found, companies were moving forward with only a “skeleton plan” for the coming year’s budget. From there, they would use the best analytical models to quickly pinpoint growth opportunities, and then move to capitalize on them. Under this “less is more” budgeting strategy, businesses could finally understand what was working and evolve.
One company Katz investigated, a California waste management business with $40 million in annual revenue, saw enormous success in moving from a yearly planning period to one that could be updated from month to month. Rather than making more work for the company’s controller, the strategy allowed the company to make key investments at the right time. As a result, the company was able to respond to shifts in the volatile commodities market, for example, to make an informed decision on when to purchase new materials or hold off. The company even understood how natural gas prices were trending on the market, and used that information to invest in technology that could convert compost waste into compressed natural gas.
That level of insight and agility can be elusive even among the biggest, most talent-rich organizations. What really enables financial flexibility is freedom from the same old way of doing things. Consero not only helps businesses unload tedious yet critical F&A tasks, it also gives them the tools and talent to collect disparate data, compile it into an intuitive interface, and give finance teams answers to their most pressing questions.