Budgeting – Why do companies do it?
Before jumping into the best practices, it is important to understand why companies do the budgeting exercise – either yearly or on a more frequent basis. Is it just to complete one more activity that needs to be done every year? Definitely not, but budgeting process allows the entire organization to come together and focus on the goals they want to achieve, draw action plan to achieve the goals and detail the same in financial terms. This helps them to walk out with what the next year looks like for them. It also helps facilitate in presenting a summary of the same to the various stakeholders depending on the type of the organization – investors, board of directors, top management, employees, customers and prospects on how the business is going to be sustained and grown.
Based on the needs, the organization should figure out the methodology of budgeting process i.e. how detailed the process should be carried out, at what frequency, who in the organization should be involved etc. Budgeting best practices and supporting technologies in the form of CPM products can help in a long way to determine the effective budgeting process.
Budgeting Best Practice # 1: Budgeting part of the corporate culture
Budgeting should be adopted as part of the corporate culture. It should not be just a chore of top management and finance, but there should be organization-wide commitment. This should be an exercise where senior management sets realistic targets and require department managers to produce their own plans and tie incentive compensation to their ability to manage their business and achieve their goals. Availability of effective CPM tools helps in the process, as an important ally and overcoming obstacles to adoption of budgeting as part of the corporate culture.
Budgeting Best Practice #2: Synchronize the Strategic and Operating Plans
Finance and top management creates long-range strategic plans ...
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that align to goals and major initiatives. Now the budgeting process is where the detailed operating plans are drawn out. Both the strategic and operating plans have to be synchronized and related. The operating plan should not be totally different from Strategic Plan. This ensures that the line managers work towards the same goal optimization set out by the top management. Ideally the operating plan should flow from the strategic plans.
CPM solutions from SAP offers modeling capabilities that can ensure a clear alignment of the strategy defined in the SAP Strategy Management, and from there moving to Planning in SAP Business Planning, thereby ensuring synchronization between strategic and operating plans.
SAP solution offerings in CPM area would offer the necessary solutions for organization to adopt best practices. We will discuss more best practices in our upcoming blogs.
Muthu Ranganathan Principal Product Manager for SAP Business Planning (CPM Products)
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