Does your finance department often overestimate budgets and underestimate expenses?
You are not alone. According to GetApp’s Budget and Forecasting Survey 2019, 25% of respondents are concerned about underestimating expenses and 18% worry about overestimating their budget.
As a finance manager, if you share the same concerns, it’s time to digitally transform your budgeting and forecasting process with the help of accounting software.
Businesses that adopt accounting software will not only be able to accurately estimate their budget and expenses but also will increase the transparency of planning by 57%.
In this article, we discuss the key takeaways from the GetApp survey that will help you streamline your budgeting process.
Key findings of GetApp’s budget and forecasting survey
In June 2019, GetApp conducted an online survey to evaluate how small businesses plan their budgeting and forecasting processes. Respondents included managers, staff, CEOs, directors, consultants, CFOs, CTOs, C-level executives, VPs, the board of directors, and executive VPs in the financial and accounting sectors. For a detailed break-up of the demographics, click here.
The key findings of the survey are listed below:
- 42% of respondents are “moderately” involved in their company’s annual budget.
- 49% indicated that next year’s budget will be “somewhat bigger.”
- 17% feel that “increasing employee productivity” would be one of the top three goals when planning the annual budget.
In the sections that follow, we list seven takeaways from the survey based on the key themes in our findings. The sections provide an overall summary of how often the respondents plan the budget, the types of budgeting techniques they use, and popular tools for planning budgets.
Accounting and finance leaders are more agile in frequently adjusting their annual budget
The profits and loss (P&L) statement is key to understanding how a business spent its money in a year. It is like a report card of the budget because it identifies the areas of your business losing money. This way, you avoid reinvesting in those areas next year.
Finance and accounting leaders are increasingly following an agile approach to plan their budget, based on short-term expenses that may arise due to unforeseen circumstances.
For instance, you may have to lease or rent a property for a specific, short duration because of the seasonal demand for your products and services in certain cities and states. Adjusting your budget quarterly will provide more scope for an increase, if costs of renting new properties temporarily rise.
In addition to adjusting annual budgets in a financial year, 41% of respondents indicate that they spend three to four weeks on planning and approving budgets.
- Not spending the right amount to add more customers and revenue: 26%
- Underestimating how much my business will spend next year: 25%
- Not spending the right amount on specific projects: 20%
Investing the right amount of money in expanding your customer base and revenue is essential to business growth. Adding customers brings in more money and increases your budget, hence increasing the overall cash flow volumes.
Types of budgeting and forecasting processes adopted by accounting and finance leaders
There are three types of budgeting and forecasting processes that can help businesses plan their budgets more effectively. Choosing a type depends on the extent to which external factors, such as business activity and expenses, affect your budget planning processes. These processes are briefly defined below:
- Ad hoc budgeting: Budget is created to meet ad hoc or additional business expenses that may arise in a budget year due to unforeseen circumstances.
- Zero-based budgeting (ZBB): Budget is created from scratch based on previous years’ expense trends.
- Activity-based budgeting: Budget is created based on activity-based cost accounting that analyzes business activities such as hiring costs, project cost estimates, and budget for marketing campaigns in the current financial year.
Of these accounting methods, 38% of our respondents prefer ad hoc budgeting, followed by activity-based accounting (33%) and zero-based accounting (27%) for individual projects.
Ad hoc budgeting is ideal if your business handles short-term projects. This process will allow your budget planning to be more agile, as expenses in short-term projects fluctuate more often than in longer-term projects.
Unlike project-based budgeting, which largely depends on vendor or client needs, activity-based budgeting is used for scoping internal business activities such as sales campaigns and employee expenses. It’s another form of agile-based budgeting that adjusts a budget as per your internal business requirements or activities.
ZBB requires a lot of research into and the analysis of previous years’ budgets and meetings with key stakeholders. To calculate expected returns, budgets are planned from scratch—hence, the word “zero”—as per the estimates from P&L statements.
Popular budgeting tools used by accounting and finance leaders
On-premise accounting software was the popular choice for our respondents. A few respondents from professional service businesses, such as a law firm, note that their in-house software development team designed a budgeting solution on their own.
At GetApp, we recommend cloud-based accounting software for small and midsize businesses that don’t have programmers to design their own solution or that want a cheaper alternative to the expensive solutions in the market.
How you can apply GetApp’s key takeaways in your next budget
Here are some recommendations to help improve your budget planning based on key insights from our budget and forecasting process survey:
- Analyze and research your previous years’ P&L statements and budgets to figure out the expense and cost accounting trends for the next budget forecast.
- Set aside time in each quarter to plan your budgeting process. This way, the process will be more agile to accommodate unexpected project expenses.
- Adopt the ad hoc budget planning process to anticipate additional costs that may arise in individual projects.
- Use accounting software to plan your budget more effectively instead of using spreadsheets to track expenses and project budgets.
- Anticipate for budget overruns, which you can counter with an additional allocation of 10-20% in each financial year.
The analysis of our survey results in this article should have given you a comprehensive overview of a few best practices that your finance department needs to adapt. In addition, here are some more GetApp resources to help you plan your budget:
- View GetApp’s budget directory to shortlist the right software based on your business requirements.
- Check out GetApp’s category leaders for accounting to shortlist accounting software, specifically for budgeting.
- Read our accounting blogs and identify solutions to specific business challenges about budgeting and accounting processes.
Update 07/10/2019: This article was originally published in 2017 based on earlier survey results. In June 2019, we conducted a new survey of 205 respondents in finance and accounting roles, based in the United States. This article has been updated with the latest survey results.
Methodology and demographics
GetApp conducted an online survey in June 2019 to evaluate how small businesses plan their budgeting and forecasting processes. About 205 respondents in accounting and financial roles took the survey.
Demographics of the respondents were as follows:
- What best describes your current role?
- Manager: 53.66%
- Staff: 15.12%
- CEO: 8.78%
- Director: 7.80%
- Consultant: 5.37%
- CFO: 1.46%
- CTO: 1.46%
- Other C-Level Executive: 1.46%
- Vice President: 1.46%
- Board of Directors: 0.98%
- Executive Vice President: 0.98%
- Other: 0.98%
- COO: 0.49%
- What best describes your current employment status?
- Employed full time: 96.59%
- Employed part-time: 3.41 %
- How many people does your business employ in total (including all branches/franchises/locations)?
- 49: 20.49%
- 51-199: 32.68%
- 200-499: 21.46%
- 500-999: 25.37%