Note: This is the third post in this series.  You can read Part I and Part 2.

Given the challenges in the budgeting process, leading companies have moved to a new budgeting paradigm that emphasizes speed and flexibility.  Here are eight ideas to incorporate into the budgeting process:

• Establish key linkages between the strategic plan, the Sales & Operations Plan and the financial budget.  The numbers in the financial budget should be the culmination of a planning process that begins with the strategic plan and incorporates demand and supply plans from Operations.
• Scale down the budget.  Reduce the number of line items budgets to focus on the true drivers of revenue and cost.  It isn’t necessary or desirable to create a highly detailed budget.  Focus on key line items that are material and that are derived from supporting operational detail.
• Automate the budget with a dedicated software solution.  Reduce reliance on Excel spreadsheets and manual consolidations.  Invest in a dedicated software solution that provides a web-based interface for users, workflow, security and that automatically rolls up budgets at each level of the organization.  These software packages also facilitate the reporting of actual, budget and forecast data.
• Employ zero-base budgeting.  Don’t use last year’s numbers as a base for the upcoming year.  It’s too easy for managers to simply resubmit their numbers without going through the exercise of determining costs based on estimated activity volume.
• Document budget assumptions (e.g. growth rates, estimated activity volume).  Just as footnotes are an integral part of financial statements, the assumptions made to develop a budget are also critical.  Assumptions must be realistic or the budget will lose credibility.
• Foster dialogue across functions.  The process of budgeting, if done correctly, can add as much or more value as the budget itself.  When departments work together on an integrated budget, they gain a better understanding of the challenges facing the overall organization.  Strong communication leads to more useful budgets.
• Move compensation goals from a static budget to a series of balanced KPIs.  Yes, some will still be financial in nature and a streamlined budget can capture those.  Revenue, Gross Margin, EBIDTA, Return on Invested Capital can all be measured against pre-established targets.  But managers should also be evaluated on non-financial factors such as product innovation, time-to-market, employee satisfaction, customer retention and customer satisfaction ratings.
• Allocate capital based on a dynamic forecast rather than on a static budget. In most industries business events occur too quickly to depend on a static budget for capital allocation.  Leading companies use their forecast to identify emerging market opportunities and enable them to respond more quickly to those opportunities. 

Budgeting still matters, but to obtain the greatest value from the budgeting process, companies need to adjust to the present realities.  By following tips outlined above, companies will produce more meaningful budgets with less effort and cost, freeing up time and management attention to focus on creating value in their businesses.