Budgeting time is here, and you’re likely going to make some safe assumptions on the budgeting based on previous years, experience and forecast. But is are these backed by actual real data? Below John Orlando, CFO at Centage Corporation, talks Finance Monthly through data integration in budgeting, looking at specific trends we can expect in 2018.
At the present moment, the economic future looks good. Unemployment is dropping, inflation is manageable and both the House and Senate passed tax bills that will slash the corporate income tax rate, giving them added cash to grow. Over the past few months I’ve talked to many CFOs who say their companies are eager to expand and they’re actively building growth assumptions into their budgets.
However, even in the best of times, there are risks to growth since at any time some world event can affect economic conditions. Performance monitoring and forecasting are part and parcel to business success in a growth economy, and to the end, 2018 will see some positive data-driven trends emerge that will make it easy for executives to keep a watch over their businesses.
The data goldmine: CFOs and financial teams will look to the robust data-generated HR, CRM and other platforms to feed their budget models
Many mid-size companies have implemented third-party HR and CRM systems, platforms that generate robust datasets. For instance, PEO providers maintain detailed records on every type of employee or contractor who works with the company, as well as their benefit requirements. Salesforce.com tracks virtually any type of sales and metric important to the company. This data, much of it market-tested, offers a level of detail it would take an army to create. By entering or importing it into a budget model, finance teams can create highly detailed and robust budgets in a remarkably short time frame.
Organizations will be more assertive with their assumptions
With robust and accurate data from internal systems populating the budget, executive teams will have access to variance reporting that is far more accurate than ever before. Moreover, this level of specificity will prompt CFOs to be more assertive in their assumptions, as well as provide the confidence management teams need to execute on their growth plans.
Greater accountability in business decisions
Marketing pioneer John Wanamaker famously said, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” He wouldn’t say that if he were alive in 2018. The combination of robust data and better performance tracking will make it easier to assess the outcomes of virtually all business decisions (including advertising campaigns). The result will be greater accountability in business initiatives as CEOs obtain the tools to compare current results to the budget, forecasts and what occurred in the past.
With greater accountability comes greater learnings and more success
Armed with a better sense of what worked and what didn’t, business leaders will have keen insight into which activities, markets or initiatives are worth repeating. I can envision companies establishing new metrics with a greater degree of specificity than was possible in the past, supported by data-driven budgets and the ability to track budget versus the actual on a constant basis.
Forecasting will be the next big innovation in budgeting
Looking at the budget software market itself, I believe the next big innovation will be easy forecasting, driven by customer demand. CEOs in particular want streamlined and simple forecasting whether it be monthly, quarterly or half year, and will pressure their providers to deliver it.
I, of course, support this demand. As anyone responsible for a budget knows, within a few months of a budget’s completion, there’s a good chance some or all of it will be out of date. Benchmarks must be reset regularly as market or economic conditions change. If a particular product suddenly begins selling better than another, the company will no doubt want to rejigger resources in order to exploit the opportunity (or retrench in the face of disappointing sales). This is particularly true when companies are embarking on ambitious growth plans.
Growth opportunities and market conditions will move CFOs away from spreadsheets to budget models
Ten years ago, 90% of mid-size companies built their budgets in spreadsheets; today from what I see, it stands at 80%. As more and more executive teams realize the inherent power of a budget, I suspect that number will go down quickly, replaced by budgeting software that allows them to monitor performance much more frequently. But don’t expect a public mudslinging between budget-software providers. Growth in our market will come from first-time customers, rather than