By Kyle Ludwig, Managing Director, CBIZ Private Equity Advisory

Many middle-market businesses with established budgeting processes begin to mobilize an annual budget around the start of Q4. However, discussions should start much earlier if you lack a routine planning process, don't fully understand the “why” of budgeting or seek to make significant changes to your processes.

Aligning the primary objectives of a budget can help guide the development of the most effective budgeting process for any business. A well-fitting budget process balances the investment of cost and effort with the value of achieving those key objectives.

Here are some of the most common key objectives for designing your company's annual budgeting process.

Budgeting Objective

Compliance: 

• Fulfill an external requirement (i.e., credit agreement covenant).
• Consider a top-down approach, leveraging a summarized financial model to minimize the number and effort of involved personnel.
• Do: Focus on key metrics important to the external party implied by the budget scenario (e.g., Net Leverage, FCCR, etc.).
• Don't: Expect to provide data-driven variance analysis to the budget scenario.

Accountability:

• Hold leaders accountable for financial performance.
• Either invest in a uniform process for all leaders or specify metrics and granularity for each leader's planning process output.
• Do: Clearly define each leader’s responsibility so that budget inputs are mutually exclusive and collectively exhaustive.
• Don't: Expect limited iteration; emphasizing accountability may lead to 'sandbagged' initial budget submissions.

Transformation:

• Define a plan for substantial change in the business (e.g., new product /market, extraordinary investment in OPEX, insourcing / outsourcing, etc.).
• Develop detailed assumptions/drivers to model business changes, emphasizing future variance analysis for performance context.
• Do: Maintain the budget scenario to clearly segment the P&L impact of core business from initiative #1 from initiative #2.
• Don't: Minimize attention paid to budgeting-related and unrelated changes in the core business.

Optimization:

• Provide a detailed roadmap to achieve meaningful profitability improvement through either cost reduction or revenue expansion.
• Common methods (e.g., zero-based, bottom-up, top-down) can be used to arrive at the end budget scenario, but it must be built from detailed assumptions and data attributes (e.g., customer, vendor, employee, etc., even if reverse-engineered) for actionable tracking against the improvement roadmap.
• Do: Build efficient, detailed variance analysis and reporting; invest as much into ongoing performance management processes as the budget creation.
• Don't: Destroy the usefulness of detailed support by including material “topside” adjustments in the final budget scenario.

Aligning the primary objective(s) of an annual budget process provides a framework to evaluate what aspects of the planning process should be emphasized. Planning processes vary tremendously in terms of sophistication, effort, contributors and detail; the process that “fits best” does not (and should not) maximize all aspects.

To learn more, see CBIZ PE Advisory M&A Update - Q2 2024

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