You know that feeling of unease, a sure sign that the dreaded date is approaching. Yes, budget season is just around the corner! Every year, at the same time, it is the same ritual: a moment finance professionals would gladly do without. An intense period when it would be nice if days lasted 34 hours (and even then, would that be enough?).
Yet building budgets is essential for companies. Budgets make it possible to set targets and get visibility over the next 12 months. This is all the more true as the company grows. The board of directors and investors want to know the expected results for the coming year. And to provide them, you have little choice but to go through the budget process.
A company's growth can also lead to the creation of a group of companies. A group is then made up of several separate legal entities. This multi-entity structure also has an impact on how the forecast budget is built.
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You often hear about budgets and forecasts. They are two different but related concepts. In fact, forecasts are based on the budget.
The budget is generally an annual exercise. It is prepared at the end of the year to plan the figures for year N+1.
During the year, companies prepare forecasts that take into account:
These forecasts can cover a period shorter or longer than 12 months.
Note: for example, many companies adjusted their forecasts in April 2020 during the Covid-19 pandemic. This was especially the case for industries that were brought to a standstill (such as the restaurant sector) or boosted (some e-commerce sites, for example) by the situation.
There are 3 types of budgets. A budget is built either:
The most common type of budget is the one built on the income statement. When people in the profession talk about a "forecast budget", they (most of the time) mean the income statement budget. Is that a misuse of language? You could say so, since a budget is by nature a "forecast".
If the budget is so central to finance professionals' discussions, it is for good reason! Building a forecast budget is like having a recipe to follow to cook a good meal: you know where you are going and what result you want! Building a forecast budget therefore lets you know the targets set for the coming year. That is why budgets are often important to investors.
For a group made up of several entities, building a forecast budget also makes it possible to compare the group's expected performance with that of each entity. In some cases, the company is not made up of separate legal entities. However, it may still need to analyze the budget by location (countries, offices, stores, …). In that case, this comparative budget analysis can be done using analytical dimensions.
A budget also helps you anticipate financial difficulties for year N+1. You can then define corrective actions to take for each entity.
Finally, a budget lets you check, during the year, whether the targets it set are being met. To do so, you simply compare the "actual" accounting data with the budget. Let's go back to the recipe analogy. Comparing the photo in the recipe with the dish you made yourself lets you assess whether you hit the target. The more it looks like the photo, the more you can consider that you have reached your goal. The same principle applies to budgets! The more closely actuals match the budget, the more you will have reached your target.
Building a budget: which method should you use? You have several options:
In the first case, you build a budget as if you were founding a new company. You start from scratch, with a blank page. Each accounting line is created and filled in according to the company's needs. This method is generally used by start-ups or when a new entity is created.
You can also build your forecast budget from the data in your accounting software. This technique will inevitably save you time! In this setup, you start from the monthly accounting data for year N to build the budget for year N+1.
There are several ways to adjust the accounting values:
Finally, we recommend building budgets by scenario: optimistic and pessimistic. If you want to create scenarios, it can be useful to start from an existing budget. Working this way, applying a growth percentage (positive or negative) may be enough.
As you can see, these 3 options apply to any company, whether it has a single legal entity or multiple entities. Now let's look at the specific points of budgeting for multi-entity companies!
How do multi-entity companies consolidate their forecast budgets? Drawing on our experience with more than 10,000 companies using our platform, we have put together a selection of best practices. Our clients have an average of 4 entities per group. So how do they go about it?
First, they build their budget per entity using a combination of the 3 techniques presented above. This budget can be built at subsidiary level, if the structure of the finance team allows it, or at group level.
As always in consolidation, particular attention must be paid to intercompany entries. Close coordination with the Group CFO is a must to make sure no intercompany entry is missed.
Finally, our clients consolidate their budget in a consolidated view made up of the budgets of each entity.
Let's get practical! Which software should you use to build your forecast budgets?
You can always build your budgets in an Excel file. However, you will run into obvious limitations: risk of errors, difficulty collaborating on the working file, and obstacles to sharing the budget.
As mentioned above, our multi-entity clients manage their budgets directly in EMASPHERE. In this case, budgets are built in our CPM platform (also called EPM, Enterprise Performance Management). These platforms offer great possibilities for:
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Your budgets are ready, congratulations! You have probably built classic tables that look a lot like an income statement, a cash flow statement or a balance sheet.
Don't stop there! The next step, of course, is to build reporting based on this budget. That reporting will make your budget more digestible and actionable. Why? So it is easy to understand when it is shared with the people concerned! Remember: you may have spent hours on your budget, but your colleagues haven't. They will have a harder time finding their way around it than you, who know every line of the budget by heart.
In your dashboard, you can present your data as:
Our advice? Include the comparison between budget and actuals in your reporting.
Would you like a similar visual for your budget scenario? Contact a member of our team and mention your interest in the "budget and forecasts" module!
EMASPHERE includes a built-in budget management module. This module makes building the budget more agile, and it also makes the data easier to visualize and compare. Sharing budgets is simplified too, via our platform. With their personalized access, users can analyze the budget they have been given access to. For example, you can give each subsidiary director access to the budgets of their own entity, rather than to all budgets.
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