Improve cost control with better forecasting and budgeting process

by Gregory Gjini Gregory Gjini | 1/24/23 12:21 PM

When the company's overall challenges are growing, an important part of the solution may be to decentralize the processes and thus increase ownership of costs and income. Digital tools can improve forecasting and budgeting process, including creating an updated overview.

Improve cost control with better forecasting and budgeting process

The world economy is in disarray. Recession is looming. CFOs and finance teams face more challenges than in a long time helping their business thrive and survive. And wary CEOs are frequently asking them to provide updated cash flow forecasts.

Also, they are asked to detect what potential short term cash savings can be materialized. This can be a time-consuming task for those that employ manual processes and Excel sheets. How should CFOs prepare to be at their best right now?  

Smart tools and better forecasting and budgeting processes can improve cost control in your business. Smart digital tools can give you a clear overview of the costs that are expected to be incurred in the future. The same tools can help you make informed decisions about how to allocate resources and manage expenses in the period ahead. Furthermore, better tools can also help your business monitor and report on actual results.

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We are convinced that certain measures can contribute greatly to your company’s financial management:

1. Get help creating cost awareness using the decentralized budget and forecasting process

A decentralized budget and forecasting process encourages individual departments and business units to make more informed decisions about how to allocate resources and manage expenses.

Maybe even more importantly, decentralized processes can help create a better culture of cost awareness throughout the organization. When they are responsible for creating and managing their own budget, they typically become more invested in their business unit’s performance.  


2. Help the organization focus on what matters most through driver-based budgeting and forecast planning  

This approach can be especially useful for organizations that are facing dynamic or rapidly changing market conditions, for example during a recession. It links the budget and forecast to the key drivers of the organization's performance.

Driver-based budgeting and forecasting allows your business to identify and prioritize the activities, initiatives, and investments that are most critical. This permits the organization to more effectively allocate resources and make strategic decisions that align with your goals. The opposite (and traditional approach) is simply basing your planning on past performance or historical trends. 

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3. Simplify the budget and forecasting process  

A simplified budgeting and forecasting process comes with clear benefits, especially in a recession. Most importantly, it can be carried out more often. This means that budgeting and forecasting processes can actually help you detect and correct deviations much faster.

Involve only the people necessary. Establish clear guidelines and templates to ensure that everyone is working with the same information. Keep it simple, and include only the most important factors and metrics that will drive the business's performance.

Use a rolling forecast which updates the budget and forecast on a regular basis – to take into account the latest available data sources, trends, and market conditions.

4. Clarify consequences for alternative measures 

CXOs often host differing opinions on how to respond to internal and external challenges. But how would different measures play out for the company? With a flexible tool it is easier to create more scenarios. 

This makes it easier for the finance team to evaluate the potential impact of different strategies and make more informed decisions about how to respond to economic changes. Different scenarios reflect different economic conditions or changes in key variables.

Thus, the CFO can simulate the potential outcomes of various strategies and identify which approach is most likely to achieve the organization's financial goals. The tool can also help the organization to identify potential risks and to prepare contingency plans and budgets for different scenarios. Also, quick adjustments of the budget and forecast can be done in case the actual economic situation deviates from the base scenario.  


Getting practical 

Let's try to approach the practical. At the start of 2023, companies face a number of challenges, including the fact that various costs have risen significantly in recent years. For example: 

  • Raw material costs 
  • Energy costs 
  • Financing costs 
  • Transport costs 

Behind all these costs are different numbers of units linked to activities. It could be, for example, that next year's sales and financial forecasting requires you to buy in and process 30 tons of steel. Or that the production involves the use of 2 megawatts of electricity distributed throughout the year. 

What we are trying to say is that the company's total costs consist of many cost-driving activities. The relevant units may be kilowatts, kilos, tons, kilometers, interest rates and so on. The key point is that the best knowledge of how much is required of each individual component is found far down in the organization. 

And it's not just the knowledge that gets most precise the closer you get to the place of activity. Ownership of the costs is also usually better closer to the action. There, they know what is needed, and they have a better basis for saying how savings can be implemented: 

  • A decentralized process provides increased awareness 
  • ... and better knowledge of the costs 
  • It will be possible to "turn over all the stones" in search of savings 
  • More people get ownership of the costs 
  • ... and the improvements 

A simplified budget and forecasting process means that it can be carried out more often. Thus, these planning processes and activities can help you detect and correct deviations more quickly. By creating different scenarios, the company can more easily set up alternative measures and outline different consequences in the face of falling demand. 


The forecasting and budgeting software you need 

From a CFO or controller's point of view, this can sound like a dream. However, gaining a sufficient overview and keeping it updated can turn out to be a never-ending nightmare. 

Fortunately, digital tools can play an important role here when the company prepares budgets and forecasts. This applies not least to tools that offer automatic and immediate consolidation of budgets, where you can follow the status of ongoing processes.

Such functionality is particularly useful in unpredictable times, such as a recession, when changes in the framework conditions mean that forecasts must be updated again and again.

Through Effectplan, House of Control's customers have gained access to the Nordic region's leading  budgeting and forecasting software. Would you like a demo of how this tool can improve planning in your company?  


Contact one of our experts if you are ready to see inside our platform and ask the important questions you have


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Additional Reading