A Smarter Department Budgeting Process: From Sales to IT

A Smarter Department Budgeting Process: From Sales to IT

More often than not, departmental budgeting is a farce. People go through the motions because it’s what they’ve always done, but in reality, the traditional budget management process is broken.

The problem with traditional department budget management

Within most companies, budget owners have to wait for finance to complete their monthly budget forecasting and close process before getting updated budgets each month. How can you manage your budget if it can take weeks before you know where you stand?

Not to mention the tricky process of setting your annual budget. A primary function of department budgeting is to provide each team with the resources it needs to meet its targets. But the exercise is often riddled with internal politics due to the conflicting agendas of each department.

Managers could opt to inflateexpense budgets so that they have a cushion to fall back on. The finance department might want a tight budget to control costs, while the marketing department might want a higher budget to motivate the sales team.

Fortunately, there are better ways to manage department budgeting.

This post will provide you with a few ideas on how to prepare a better departmental budget. We’ll also discuss some budgeting best practices for your sales, marketing, and IT departments.

How to create and manage a budget for your department

Here are some essential points to consider when working on your department budgeting:

Choose the right starting point

Department budgeting is usually carried out using conventional and long-established procedures. A typical starting point is last year’s budget. While there’s nothing wrong with this approach, there are potential drawbacks to consider.

If your department didn’t achieve its goals last year, similarly allocating resources for the next year could be a mistake. In the wise words of Albert Einstein, “The definition of insanity is doing the same thing over and over again, but expecting different results.”

Also, don’t use previous year figures as a baseline if your department’s priorities have changed. In doing so, you may lose sight of the new direction and end up with a departmental budget that isn’t aligned with the company’s objectives.

One size does not fit all

Remember, the budget you prepare for your department will be combined with others in the company. This means the budgeting template provided to you will likely contain standard line-items relevant to the entire company. But your department’s needs for the coming year may not fit into this format. If you face this issue, be sure to bring it up when discussing your department’s budget with finance.

Your department is one piece of a larger puzzle

You’re one part of the big picture—if you don’t meet your targets, the entire company’s budget could be impacted. So, it’s crucial that you don’t work in isolation. Involve your team members in the budgeting process, and if possible, other department heads as well. When others understand why decisions are made, they are more inclined to work towards the same goal.

Speak the language

The finance department is responsible for compiling the budget data. So it would help if you learned to speak the language of finance and accounting to make sure you’re on the same page. Finance will be particularly concerned with the cashflow impact of your proposed expenditures and your proposed operating costs, so make sure you’ve got your assumptions and calculations right.

Aim high but stay grounded

When you are determining your operational budget, it’s okay to set stretch targets and ambitious financial goals. But remember, it’s far better to underpromise and overdeliver than to have to explain budget shortfalls at the end of the year.

Sales budget planning and management

Any budgeting process must start with the sales budget. It is the foundation of the company’s financial plan and will determine how resources should be allocated across all other teams to achieve the company’s revenue objectives.

Start with sales forecasting

Forecasting sales is the most important part of the sales budget and there are various ways to go about it. If the business is new and lacking historical sales data, it’s best to lean on qualitative information such as market research studies or sales rep feedback to determine your forecast assumptions.

However, if you’ve been operational for a few years, the best practice is to extrapolate historical sales data and make adjustments based on the anticipated operating environment. This includes industry shifts, the current competitive environment and economic forecasts. Be sure to smooth out effects of once-off occurrences that are unlikely to happen again.

Refine down the line

Once an initial sales budget is determined, speak to internal stakeholders to tailor it to the current year’s strategic direction. The budget should be adjusted to account for the current run-rate of customer growth, any planned expansions in team size, or geographic regions, changes in product pricing, significant promotional campaigns, etc.

Armed with a sales forecast, sales managers and department managers can now formulate strategies to reach these goals and allocate resources to various initiatives.

IT budget planning and management

This area can present unique challenges. This is because the ideal IT budget breakdown should have three specific components:

  1. An operating budget. This would include an allocation for software licenses, human resources expenses, and other routine costs.
  2. Outlays for enhancing the department’s capabilities. A new souped-up website would fall into this category.

In most companies, both components are approved with little resistance, because the benefits are tangible and easily understood. It’s the third component that can present problems.

  1. New initiatives. Any forward-thinking IT department would recognize the need to include new initiatives in budget planning. This includes allocating resources for transformational technologies, such as AI, robotics, blockchain, and IoT. The payoff may not be immediate, but ignoring these nascent technologies could seriously undermine your competitive ability.

IT budget management involves another critical issue. The performance of practically every department within an organization is closely linked to the IT department’s effectiveness. Consequently, the IT budget should be finalized only after taking inputs from every department into consideration. This can be challenging, especially if some departments are less tech-savvy.

Marketing budget planning and management

Brand vs. demand generation

When setting a marketing budget, you’ll likely get caught up in the brand vs. demand generation debate. Should your company invest more in driving immediate results that can easily be tracked or in cultivating the long-term brand of the company?

Most companies set aggressive sales targets. Consequently, there’s pressure to prioritize the marketing budget for initiatives that will result in an immediate increase in lead generation and sales. And as a budget owner, you want to track how effective the expenditure was.

The other side of the argument—promoting the brand—takes a longer-term view. Instead of pushing sales, you’re spending on establishing brand recognition, communicating your company’s values, and generating brand loyalty. These initiatives typically reach a wider audience but provide little data on customer engagement and effectiveness.

Choosing between demand and brand generation can be a tough decision. Ultimately, it’s the CEO who will set the tone for determining the marketing budget breakdown. In most instances, this means finding the right balance between the two.

How much should your marketing budget be?

The percentage of overall budget allocated to marketing varies greatly across different industries. The following chart from the CMO Survey illustrates this point.

Marketing Budgets By Industry

Marketing accounts for what percentage of your overall budget?

Source: The CMO Survey and Deloitte Digital and The Wall Street Journal

If you think you’re allocating too much or too little to marketing, you can benchmark your spending against industry peers to make a quick comparison.

How to transform the budgeting process across departments

The common challenge that every department faces during the budgeting process is setting and hitting its numbers.

Lola.com’s spend management solution provides an elegant solution to streamline the process. Here’s how it works:

Budget managers allocate their budgets by person, category or vendor within the spend management platform. Each staff member gets a corporate card (virtual or physical) that is linked to these budgets. This means every single transaction is instantly categorized and mapped to the budget, so you can track it in real time. You can control spend by setting custom limits—as granular as per card or by team—and set restrictions on what can be spent on, how much, and by who. Any charges that would put you over budget are automatically declined, so you’ll never overspend.

This technology can give you real-time control over spending, so you always know where you stand and how much budget you have left to achieve your goals. This means when opportunities pop up or unexpected issues occur, you’ll no longer have to wait days or weeks after each month-end to figure out how to reallocate your resources.

About the Author: Ravinder Kapur
Ravinder Kapur is a commerce graduate and a fellow member of the Institute of Chartered Accountants of India. He has been affiliated with various interests in the financial services industry in India for more than 30 years.