Why are we doing a Budgeting Exercise?

Budgeting is a key finance function. If the organization has the right process in place, there is no reason to dread budgeting activity–whether your organization budgets annually or on a rolling cycle. The best budgeting process for a portfolio heavily depends on organizational culture. When approached in the right way, the portfolio budget has the power to bring organization together, bridge gaps and eliminate silos.

Following are some reasons why the organizations should go for Annual Portfolio Budgeting exercise: 

• Provides the accurate picture by showing the need vs availability of funds and improves the understanding of portfolio objectives towards corporate goals
• Fills the need for required information to the funders
• Helps maintain fiscal control via preventive measure to avoid surprises

Elements of Portfolio Budget

The portfolio budget depends on portfolio complexity; funders and their needs; programs, projects or activities priorities the funds are being used for, etc. 

Portfolio Budget typically includes the following elements:

• Estimated Expenses. The amount of money portfolio expects to spend in the coming fiscal year,  broken down into the categories expected to spend it in 
• Estimated Income. The amount of money portfolio expects to take in for the coming fiscal year, broken down by funding sources  
• The interaction of expenses and income. In many cases, this is a funding condition that only a particular program or operations would get funded from the provided sourcing. It is important to build these constraints into the portfolio budget.
• Adjustments to reflect Actual Cost as the year passess by. Portfolio budget likely begins with estimates. As the year progresses, those estimates need to be adjusted to be as accurate as possible to keep track of what is really happening.

Best Practices Consideration

Aligning the portfolio budgeting process with the overall organizational strategy is the first best practice that should be in place. There are other ways as well to ensure that a successful budget is created that empowers business growth and helps portfolio components meet their individual objectives.

Following are the best practices for making the Portfolio Budgeting process successful:

1. Connect your data

Disconnected data is one of the top challenges that can be a real pain for the finance team during the budgeting activity. Data is critical to the budgeting process allowing the decision makers to understand what drives performance, what is contributing to organizational growth, how to make changes based on market and industry conditions, as well as predicts future success. Accordingly, being able to access clean, current data itself builds a better portfolio budgeting process.

2. Remember the past

Traditional budgeting uses past data and historical trends as a starting point to assist budgeting exercise. Historical data is also critical for predictive budgeting and for understanding what drives business growth.

Comparing actual performance to past performance allows us to better predict future performance. Model scenarios use past performance data to understand the potential effects of budgeting decisions.

3. Understand business drivers and Key Metrics

Understanding which factors most contribute to an organization’s growth helps knowing exactly where to allocate organizational resources and funds for a better chance of success. An important consideration in this regard is non-financial metrics, which can be just as critical to business performance as financial drivers. Non-financial drivers and KPIs play an important role to keep the budgeting process on track.

4. Adopt Adaptiveness

Having some agility built into the Budgeting process empowers the authorities to make changes whenever the market or business requires so. Budgets are traditionally inflexible, however changes are sometimes inevitable—whether that means introducing rolling forecasting, or using scenario modeling to help decision makers foresee what is coming ahead and requiring amend the budget whenever needed.

Budget Estimation Technique

There are multiple estimation techniques available that can be helpful in the Portfolio Budgeting process. Some of them are:

Top-Down vs. Bottom-Up Budgeting

• In Top-down budgeting,  Senior management creates a budget for the portfolio as a whole, allocating resources to components according to portfolio targets for the year ahead. It uses past performance and existing market conditions to feed the budgeting process, often with some funds set aside to allow for any final shuffles.
  
• Bottom-up budgeting starts at the component level. Component teams prepare budgets based on their needs for the budgeting cycle ahead, based on shared organizational objectives to protect against siloed requests. Program/Project Managers/Department managers present their budgets for approval to the portfolio governance committee.

Zero-Based vs. Traditional Budgeting

• Zero-based budgeting is one example of a Bottom-up budgeting technique. Zero-based budgeting (ZBB) makes “zero” as its starting line to ensure that the portfolio budget remains aligned with current financial performance and priorities. While Traditional budgets rely on the current year’s budget as a jumping-off point for the new year’s budgeting cycle, ZBB takes a different approach, wiping the slate clean every time.
  
• With Traditional (or Incremental) budgeting, certain expenses are fixed, while deeper analysis is reserved for new expenses. This assists to quickly seed a budget plan, but also can be a means to potentially miss out changes to business operations, as well as possible cost savings and investments that might help to evolve the organization.

Rolling Forecast vs. Static Budgeting

A Rolling Forecast estimate always has a view into the future, letting you look into the future at all times via weeks, months and quarters cut– whatever makes the most sense based on the business process or planning outcome to which it is being applied for. This is in contrast to Static budget estimation which is tied to a fixed timeframe.

Rolling forecasts help maintain visibility into recent performance while better projecting future needs, allowing you to remain agile to new trends and requirements while continuing to move the planning horizon forward. This is specifically useful if a high-growth company has to make medium to long-term commitments like hiring or supply chain decisions or inventory purchases, or need to keep up with industry fluid demands.

Planning and Creating Portfolio Budget

It is important to know what the organizational priorities are and what makes the most sense for the portfolio at its particular stage of development. To figure out what the portfolio is spending funds on should be directly aligned with organizational strategy and results of corporate strategic planning exercise for that fiscal year.

Expense Estimation:

Step 1: Figure out ways of estimating expenses

In some cases — we have real figures for e.g. resource salaries or office rent etc. However, some other cases for e.g. utilities, materials, etc. have estimates on an average monthly basis.

There are always expenses that cannot be anticipated at the beginning of the planning cycle, and it is part of conservative estimation to make allowances for them under a “miscellaneous” category.

Step 2: List the estimated yearly expense totals for the portfolio resources

In most of the cases they include, but are not necessarily limited to:

• Salaries or wages for employees
• Fringe benefits for all employees
• Rent and/or mortgage payments for the organization’s facilities
• Utilities ( electricity, gas, water, phone)
• Internet provider or server costs
• Insurance (liability, fire and theft, etc.)
• Fixed cost (if any), for e.g. Travelling, Training, Recreation cost etc.

Step 3: List the estimated expenses for resources to continue ongoing operational activities

• Material Cost for e.g. office supplies: pencils, paper, software, educational material etc.
• Office equipment (or any other equipment related to project or ongoing operations) for e.g. computers and peripherals, copiers, faxes, etc.

Step 4: List estimated expenses for anything else not covering in Step 2 and 3

• Consultant services – these may include an annual audit, accounting or bookkeeping services, payments to other organizations for specific services, etc.
• Printing and copying, if not done within the organization
• Transportation and travel expense for staff
• Training expenses
• Recreational budget for project and program teams

Step 5: List estimated expenses for services which you like to do considering the mandatory budget requirements are fulfilled

These might include new hiring, new programs (including staff, supplies, space), equipment, etc.

Step 6: Add up all the expense items you have listed

This total is what you would like to spend to run your portfolio. In other words, it’s your projected expense for the coming fiscal year.

Income Estimation:

Use last year’s actual figures (is possible) as a baseline and estimate conservatively, rather than putting yourself in an ideal world and being overly optimistic and unrealistic.

Step 1: List all figures or estimates from known funding  sources

This includes sources that have already agreed on providing funds for the coming year, or that have regularly funded your portfolio in the past. These may include portfolio governance committee, local government agencies; private and community foundations; religious organizations; corporations etc.

Step 2: If you sell services, estimate the amount you will earn from these activities

This could be consulting services your portfolio offers like customer care products, training materials owned by the portfolio that can be sold to others interested in doing similar work, etc.

Step 3: If you solicit members who pay yearly dues or fees, estimate the amount that membership will yield

Step 4: If you sell products, estimate what these sales will bring in (based on past trends may be)

This could include clothing products, books, medical equipment, fleet and fuel software products etc.

Step 6: If you rent space or facility to other organizations or customers, record the estimate of what this will bring in coming fiscal year

Step 7: If you have any income from investments, estimate what you’ll realize from these

This could include shares, endowment income, annuities, or interest income etc

Step 8: List and estimate the amount from any other sources that are expected to bring in some income in the coming fiscal year

Step 9: Add up all the income items you have listed

This total is the monetary value you have to work with, your projected income for the coming fiscal year.

Review your budget regularly

The portfolio must have a regular monitoring and controlling process to utilize budgets effectively. Two main areas to consider in this regard:

Actual Income Compare your actual income with your baseline budget on a monthly basis by:

• analysing the reasons for shortfall or deltas (if any), for e.g.  lower sales volumes, underperforming products etc
• considering the reasons for a particularly high turnover, for e.g. whether your targets were underestimated and why?
• comparing the timing of your income with your projections and checking that they fit

Analysing these deltas will help you to set prospective budgets more accurately and also allow you to take action where needed.

Actual Expenditure Review your actual expenditure regularly against baseline budget. This helps you to predict future costs with better reliability. You should:

• check that your variable costs were in line with your budget 
• look at if your fixed costs differed from your budget
• analyse any reasons for changes in the relationship between costs and turnover
• analyse any differences in the timing of your expenditure, for example by checking suppliers’ payment terms

Budget as a measure of Performance

The baseline budget can serve several useful purposes, particularly if your budget is reviewed regularly as part of the annual planning cycle.

Benchmarking performance

Comparing your portfolio budget YoY can be an excellent way of benchmarking your business performance. You can compare your projected figures with previous years to measure your performance. You can also compare your figures for projected margins and growth with those of other companies in the same sector, or across different other portfolios of your organization.

Key performance indicators

A key indicator or a driver is something that has a major impact on your business. To uplift performance, the portfolio team needs to understand and monitor the key “drivers” of the portfolio. There are many factors affecting every business performance for e.g. YoY growth, revenue generation, increase in clientele or customer base, spread of business etc, so it is vital to focus on a handful of these and monitor them carefully.

Conclusion

Creating a portfolio budget process that examines the organization’s priorities and is in sync with organizational goals helps keep control of the organization’s finances, and also justifies the organization business. A rational budget allows the portfolio team to generate accurate reports to funding organizations and to spend their money as promised. It also gives clear guidelines about what can be spent and when.