Jirav, a financial planning and analysis (FP&A) firm based in San Francisco, CA, has published a blog post that explains the best way to budget for businesses today. Budgeting is an important business process because it allows the team to specify the direction of the business and set the stage for subsequent business decisions. In choosing the best budgeting method, it is important to note that traditional budgeting methods, such as activity-based budgeting, have their own weaknesses, but they can also offer unique advantages. This is often the reason why, in practical application, a combination of several budgeting techniques, including driver-based budgeting, can bring a whole new dimension to budgeting and forecasting. So, by today’s practical standards, the best method is actually a hybrid strategy.
There are four traditional budgeting methods. One is incremental budgeting, which is the most commonly used budgeting approach. In general, it will use historical data to extrapolate trends for the following year, while allowing for small adjustments, up or down. It’s simple and easy to do, but its weakness is that it assumes cost and revenue drivers won’t change significantly from year to year. Another method is activity-based budgeting, which is based on projected production and profitability. It has the advantage of better controlling the budgeting process, but it needs access to historical data, which can be quite difficult and expensive to implement.
The third method is zero-based budgeting, which starts from scratch and requires every penny to be accounted for in order to be included in the budget. Its advantage is that it is able to get rid of all the waste and markup that accumulates after years of using incremental budgeting. This particular type of budgeting can be particularly useful during a restructuring or when the company is in a critical financial situation. However, this may require a lot of detail and it may take a long time.
The fourth method is value proposition budgeting, where each line item or cost is analyzed for its value to the customer, other stakeholders, and employees/business. This particular budgeting method falls somewhere between zero-based budgeting and incremental budgeting, but it will not necessarily be aligned with strategic objectives as activity-based budgeting does.
As can be seen above, these more traditional budgeting methods do not offer the flexibility and visibility offered by driver-based budgeting, which takes into account the key factors or drivers to provide realistic financial forecasts. This type of modern budgeting offers several advantages, such as: data integrity; operational alignment; and efficiency and agility.
Just like with traditional budgeting methods, sales planning is the first step in driver-based budgeting. The sales team needs to align their forecasts of sales volumes, products, and prices. Then they will specify how those sales will be made, usually through non-financial factors, such as the number of sales calls to be made for each sales representative; the number of quotes per sales call; and success rate per estimate.
The five key factors to consider for any business are: cash flow; people; profit, growth; and active. Performing driver-based budgeting can provide a significant boost to the business budgeting and forecasting process. Jirav will seamlessly integrate all of the company’s accounting and reporting systems, which can be used for real-time custom reporting for any driver or metric. As a result, Jirav may be able to deliver the best budgeting software.
Founded in 2015, Jirav offers financial planning and analysis as a service using a set of dynamic tools that connect operational data and models, providing the ability to plan and report income, expenses and headcount with precision and speed. They are able to provide users with extremely powerful financial reporting, analysis and forecasting capabilities, also allowing them to establish a complete financial planning and analysis function in most businesses within hours or few. days only.
For more information about Jirav, contact the company here:
25 Taylor Street, San Francisco, CA 94102, USA