Ultimate Beginner’s Guide to Annual Budgeting (Corporate Finance)

When you ask people across companies about annual budgeting, you'll hear a lot of complaints. It takes too much time, it doesn't help me run the business, it gets out of date before

it's even finished, or there are too many iterations. But people raise these

many iterations. But people raise these concerns for one of two reasons. Either

they misunderstand what budgeting actually is, or the process simply isn't run effectively. So, in this video, I'll

run effectively. So, in this video, I'll walk you through the exact five-phase framework that eliminates all of these common complaints. The same framework I

common complaints. The same framework I used to lead 11 annual planning processes at Proct and Gamble, Unilver, and Squarespace as a finance leader. By

the end, you'll have the blueprint to lead a budgeting process that actually adds value to your organization. Let's

start with phase one, and that's the prek kickoff. This phase is crucial as

prek kickoff. This phase is crucial as this is where you plan the actual budgeting process itself. Most finance

teams know that you need to plan ahead when it comes to how to set up timelines and deliverables. But there's one thing

and deliverables. But there's one thing most finance teams skip. And that's a huge mistake. That's reviewing the

huge mistake. That's reviewing the previous year's budgeting process. What

worked? What didn't? And key lessons learned. Specifically, you want to focus

learned. Specifically, you want to focus on three things: speed, depth, and trackability. speed in the sense of were

trackability. speed in the sense of were there any bottlenecks? Were any inputs submitted late? How long did it take you

submitted late? How long did it take you to consolidate inputs and share the results with the leadership team? Did it

ever happen that by the time you were done consolidating, you were already asked to include new assumptions, meaning you were chasing your tail without the opportunity to add value through deeper analysis. And how long

did the process take in its entirety?

Was the budget approved and locked by mid- November as originally planned or did it drag on to early January? Depth

is about making sure that the assumptions behind the projections are deep enough to get value from using them as a benchmark for variance analysis.

You want to be able to learn something when you compare actuals results to your budget. But you can only achieve that if

budget. But you can only achieve that if assumptions go deeper than our VP of sales estimated demand based on his past experience. And I guess he was wrong.

experience. And I guess he was wrong.

And trackability means that most assumptions that go into the budget are actually measurable. So for example, if

actually measurable. So for example, if one assumption is that you plan to do a Super Bowl ad for the first time to drive brand awareness, then you better

have a way to track how those 30 seconds translate to purchases weeks or months later. I can speak from experience here

later. I can speak from experience here that this is no easy task. Now notice

what I didn't mention, accuracy. I argue

accuracy shouldn't be one of the main goals of a budgeting process. And this

is often misunderstood. See, the

objective of the budget isn't to be as accurate as possible. Nobody has a magic crystal ball to predict the business in competitive environment in 8 to 12

months out. Rather, it's a commitment

months out. Rather, it's a commitment what the company sets out to achieve and how. You need to be flexible. If there

how. You need to be flexible. If there

are reasons to spend more than was originally budgeted and you analyze it, the ROI is positive, go for it. Support

that decision. And if a competitor ends up doing something that nobody expected, you might as well have to deviate completely from your plan. But if you have the right depth in your

assumptions, you're that comparison of actual results to budget will still yield important insights. Lastly, once

you're done with reviewing your previous year's budgeting process, you implement process improvements and decide who needs to deliver what and by when. This

phase sets up everything that follows.

So, make sure to invest the time up front. Before I move to phase two, if

front. Before I move to phase two, if you're finding this video helpful and want to master the complete budget timeline with exact templates and deliverables, then click the first link

below to get my free 20inut video course on annual budgeting. Now phase two of the framework is joint planning. I

mentioned before that depth of assumptions is a key goal for budgeting.

The question is how do you get there? I

often see finance teams make a huge mistake. They do one of two things. Both

mistake. They do one of two things. Both

are equally bad. Finance teams create the budget mostly themselves or finance just consolidates the inputs they receive from business partners. Both

approaches lead to the same result. The

annual plan lacks depth and as a result it becomes meaningless for decision-m once actuals start to deviate from expectations. Instead, finance must

expectations. Instead, finance must collaborate with business teams and meaningfully challenge the assumptions.

Here's how to do that. Finance creates a detailed top-down plan and department heads create their bottom up by adding up the expected results of their investments and activities. Then finance

can use the top down to challenge the bottom up with data and tease out what the risks and opportunities are by asking the right questions at the right time. I cover exactly what questions you

time. I cover exactly what questions you should ask in my full course leading the budgeting process. Next up is phase

budgeting process. Next up is phase three, consolidation. Finance rolls up

three, consolidation. Finance rolls up all department plans into a consolidated P&L and balance sheet. There are two issues you must avoid here. Number one,

losing track of all the versions. And

number two, spending too much time on consolidation. Speed is absolutely

consolidation. Speed is absolutely critical here. If consolidation takes

critical here. If consolidation takes too long, inputs become outdated. I

recommend you use planning systems instead of just Excel for faster processing on automatic versioning.

Nowadays, there are software solutions available at a wide range of price points, and they don't need IT support to implement anymore. If you don't yet have a planning software in place,

create departmental snapshots that show consolidated expenses and revenues by department, not just for the entire company. This allows you to quickly

company. This allows you to quickly identify issues and communicate directly with department heads. I walk you through how to set this up in Excel in my leading the budgeting process course.

Phase four is iteration. Here's the

harsh truth. The first version rarely meets the expectations of leadership. In

fact, in 11 years of managing budgeting processes as a finance leader, it hasn't happened even once that the first round of budget inputs ended up being the final version approved by senior

leaders. Most initial bottom up plans

leaders. Most initial bottom up plans are too conservative and don't reach company targets. Here's a trick that

company targets. Here's a trick that saved me countless of hours when dealing with initial budget inputs that are unrealistic. When you ask for inputs,

unrealistic. When you ask for inputs, don't ask for single data points, but request ranges instead. So instead of sales telling you they expect to

generate 300 new leads in January, ask them to tell the best case and the worst case scenario. For the initial budget

case scenario. For the initial budget submission, you can choose to calculate revenue using the lower end of the range. And if that doesn't meet investor

range. And if that doesn't meet investor or leadership expectations, you don't have to go back to the drawing board and ask sales for a new estimate. Instead,

you can quickly adjust to using a number closer to the best case scenario. This

also makes it easy to quantify the risk involved in your plan to enable leaders to make more informed decisions. Phase

five is final alignment. This is where finance presents the final consolidated plans to the leadership team for approval. Keep in mind that a good

approval. Keep in mind that a good budget is more than just numbers. It

must communicate what strategies the teams go after, how these strategies translate to tactics, what success looks like for all of the major tactics, and

how we plan to measure it throughout the year. Once approved, the budget becomes

year. Once approved, the budget becomes the baseline for monthly and quarterly performance reviews. One last tip, you

performance reviews. One last tip, you might get requests from department heads to make changes right after the budget has been closed. Don't do it. that can

result in the endless cycles of redoing models and slides. Instead, point them to the fact that the next forecast update is just around the corner. In the

end, the annual budget is about strategic direction and commitments, while monthly or quarterly forecast updates are about accurately predicting the most likely future. And that's a

complete five-step framework for running annual budgeting that actually creates value for your organization. Now, if

you're ready to become the FPNA professional who leads world-class budgeting processes, click the first link in the description and enroll in my free video course about how to master

the budgeting timeline. In that

training, I go much more in depth into one of the most crucial aspects of the planning process, and that's deciding on deliverables and timelines. Again, click

that first link below to get it. And if

you want to watch my full beginner's guide on financial modeling, then click