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During the third quarter, businesses enter a crucial phase in their financial planning cycle. July brings a review of the first half’s financials, followed by a deeper analysis in August. By September, the focus shifts to assessing whether the year’s goals are on track.
With the fourth quarter looming, budgeting and planning take center stage. While many finance leaders may be eager to dive into setting financial targets, there are three essential steps to complete before discussing the actual budget numbers for the upcoming year.
Must-do No. 1: Take stock of the entire business.
The financial analysis of the first half of the year provides insights into what is likely to occur by year-end. It’s crucial to assess the current reality and identify necessary adjustments. Striking the right balance between realism and optimism is key. Avoid being overly optimistic or overly cautious (sandbagging). Employees may seek target relief if goals aren’t met, but granting relief without reason can undermine performance.
Moreover, consider the ongoing developments that could impact the current year and the next. Long-term investments, strategic relationships and multiyear projects all require scrutiny. Are these initiatives on track, and what’s the expected status by the next year? For instance, signing an enterprise client is just the beginning; understanding how to profit from the relationship, ensuring internal adoption and expanding strategically are crucial steps.
Don’t fall into the trap of assuming that achieving one goal automatically leads to others falling into place. Review your assumptions and assess their validity, acknowledging what’s worked and what obstacles you’ve encountered. This comprehensive assessment allows you to not only meet targets but also capitalize on opportunities while aligning short-term goals with long-term objectives.
Must-do No. 2: Plan for the plan.
Planning for the budget should begin as early as August, well before the year-end rush. It’s more than just numbers; it’s about developing a strategy. Collaborate with finance, sales and the CEO to determine the strategic goals for the next year. Your role is to translate these goals into financial plans and ensure the necessary financial support. For example, if the company plans to launch a massive marketing campaign, the business should determine the advertising budget, staffing requirements and how the campaign fits into the broader strategy.
Annual planning is not just about hitting a growth percentage target compared to the previous year. It’s an opportunity for everyone to think about where they want to take the company. This process involves numerous executives and interdepartmental coordination. Hard conversations are needed to build a financial model that aligns with the strategy. One logistical note: To ensure a successful planning process, schedule meetings in advance, as calendar slots fill up quickly toward year-end.
Must-do No. 3. Consider the holistic picture.
No single department or plan can work in isolation. To avoid misalignment, evaluate the interdependencies within your organization. If, for instance, your sales team has ambitious targets, ensure that other departments can support these goals. Check if you have the necessary resources, whether it’s inventory, consultants or internal support.
Additionally, assess the downstream effects of your budget decisions. If marketing relies on senior executives attending events, coordinate with their admin teams to ensure seamless execution. Think holistically about how each department’s needs and initiatives are interconnected and how they contribute to the overall success of the organization.
Additional consideration: Use a top-down vs. a bottom-up approach.
The choice between a top-down and bottom-up approach depends on various factors, including the size of your company, available resources and the presence of investor-driven targets.
In a top-down approach, senior management, including the CEO and CFO, set the strategic direction for the company. They define the vision and high-level goals for the upcoming year. This strategy is then communicated to different departments, and their role is to align their plans and budgets with this overarching strategy. This approach is efficient and ensures that the entire organization works toward a common goal.
In contrast, a bottom-up approach involves department heads and regional managers starting the planning process. They assess their specific needs, objectives and challenges and create detailed plans and budgets accordingly. These individual plans are then consolidated to create an overall company budget. This approach allows for more granular input from various parts of the organization and can be valuable in larger companies or those with complex structures.
The choice between these approaches isn’t strictly size-dependent; it’s more about the company’s culture and management style and the need for alignment and agility. In some cases, a hybrid approach that combines elements of both may be the most effective.
Ultimately, successful budget planning for 2024 requires careful consideration of the entire business, proactive planning and a holistic approach that recognizes the interplay between departments. The choice between a top-down and bottom-up approach should align with your organization’s culture and specific needs. By following these must-do’s, you can lay a solid foundation for a successful budgeting process that supports your company’s strategic goals.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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