Improving the

Budgeting Process
Nilly Essaides
Director & Practice Lead, FP&A
The Association for Financial Professionals
Budgets as We Knew Them
“There’s one thing [everyone] knows about
budgeting: that it’s wrong as soon as it’s done...
The question should always be,
Why are we doing
budgeting in the first place?”
– Tom Woods, seasoned FP&A professional
now working at a large bank
Agenda
• The traditional budget
• Internal and external forces of change
• Continuous planning and budgeting
• What sets top performers apart?
• Best Practices in planning and budgeting
• Linking Budgets to Strategy
Does the Budget Work for You?
Which statement best describes the value that comes from your
organization’s approach to annual budgeting?

Source: APQC
Drivers of Change
What Sets Top Performers Apart?
• Top Performers set top-down targets
• Top Performers get out of the atomic level of detail
• Top Performers use enabling technologies
Attributes of Top Performers
Planning Event Definitions: World Class Profile of an Annual Plan
Budgets Are Time Consuming
How Many FTE Day Does it Take to Complete the Budget?

Source: : AFP 2016 FP&A Benchmarking Survey

Higher System Investment =
Shorter Cycle Times
Average Cycle Time: FTE Days

Source: : AFP 2016 FP&A Benchmarking Survey

How to Fix/Shorten the Process
• Select Benchmarks
• Decouple targets from compensation
• Improve forecasting
• Keep the bank open
• Get rid of conventional variance analysis
• Sync the process using new technologies.
More Best Practices
• Have a blueprint, i.e., a good project plan
• Split in two: Business as usual and strategic
initiatives
• Sync with other planning process such as
forecasting and strategic Planning
• Check for materiality
• Use driver-based modeling in planning
• Be flexible, i.e., change gears if key assumptions
change
• Give yourself less time
Link It to Strategy
• A budget is the quantitative representation
of how a business might perform if the plan
is actualized over the next year
• To be effective it needs to be directly linked to the
business goals as defined in the strategic plan
The link to Strategy
Budgeting is about ensuring the organization
adequately funds its four core processes:
1. How revenue is generated
2. How products and services are delivered
3. How products and services are developed
4. How existing customers are supported
Reverse Engineering the Budget
• The annual budget should translate the company’s
strategic targets into financial terms; it’s the
financial execution path to for the plan
• Reverse engineer the budget to identify
management priorities
“You should be able to tell the strategy of the
organization from the details of the budget and how
resources are allocated; if you can’t then something
is not right.”
Case Study
American Airlines
• The “before” process included two
parallel processes: a financial plan
and a strategic plan
• Each had its own cost reduction
goals and objectives and cycle time
Case Study
American Airlines
• Each division produced a budget that
rolled up to HQ starting in August
with 8 months of actual data
from the ERP and a 4-months
Excel-based forecast
• In September, the operations would
begin developing their business plan
Case Study
American Airlines
The outcome:
• Combined the Strategic Plan and
Financial Plan into one
• 30-day reduction in cycle time
• 20-30% reduction in resources
• Greater strategic focus
• Better and more holistic conversation
around any obstacles to meeting
business and financial objectives
 The Link to Strategy
• What’s driving revenue?
• What are our major cost
drivers?
• How do we develop new
products?
• How do we acquire
customers?
• How do we retain
customers?
• What are our growth
opportunities?
• What flexibility do we need
in our cost structure to
support major strategic
objectives?
• Create the right KPIs
• Establish correct benchmarks for
comparison
• Allocate funds to match time line
for new product development
• Fund the customer
acquisition/retention process
• Find cost savings opportunities
through new budgeting methods
like ZBB and driver-based
budgeting and…
• …use strict governance structure
to reinvest savings on growth
based on strategic objectives
• Keep the bank open year-round
ZBB 2.0 Finding that Strategic Link
• Ultimately, “strategy equals budget.
If you say something is important
you, you’ve got to look at the wallet.
You can’t just tell people that
something is important and ask
them to do it. Management needs
to back it up. ZBB compares where
the money is spent to the business
priorities.”
Companies Use New Budget
Methodologies
What Budgeting and Forecasting Techniques Do Companies Use?
(Percent of Organizations)

Source: : AFP 2016 FP&A Benchmarking Survey

ZBB 2.0: A Strategic Approach
Originally, ZBB meant starting
everything from scratch every time
– ZBB 2.0 is different:
• It’s a sustainable cost
management method
• It’s a hybrid. ZBB 2.0 is best applied to
operational expenses, and used in conjunction
with other methods such as rolling forecasting
ZBB 2.0: A Strategic Approach
• It’s not applied to everything every time.
ZBB 2.0 is applied to different
expense areas on a rotating basis

• It ensures smart consumption.

The savings are pooled into a separate account and
the decisions on how to utilize them are managed
within a strict governance structure at the most
senior level, with the goal of reinvesting in growth
Conclusion
• The old way of budgeting is giving way to a more
dynamic, continuous budgeting approach that
allows companies to keep pace with rapid change
• Top-down, less granular budgets help FP&A shorten
the budget cycle and improve planning when
combined with a rolling, driver-based forecast
• The purpose of the budget is to fund the strategic
business plan of the organization; linking budget to
strategy ensures the organization can meet its
strategic objectives