Building a powerful annual budget that aligns with your company's vision and strategic plans is crucial for success, especially as we head into 2025. This year presents unique challenges and opportunities, making a robust budgeting process more critical than ever. By carefully examining historical data, setting clear objectives, and developing a comprehensive plan, you can navigate the year ahead with confidence.
Examine the Past Year and the Environment When Setting Your Annual Budget
To lay the groundwork for your 2025 budget, start by gathering your historical budgets and actual results from the past 3-5 years.
- Define and review the past performance, environment, and leading performance indicators, as well as past profitability relative to past goals.
- Analyze the company’s current internal and external environment to obtain information and insight that will help predict the future. Identify the key variables on which the business relies.
- Review and evaluate the leading indicators and major drivers of business for the current year. For example, if profitability is largely dependent on labor costs, examine current and projected trends in labor costs while creating the budget.
- Use industry trends and appropriate local and global economic trends to guide your thinking. Statistics are available from several government and industry sources.
- If you have a general idea of the percentage of the total market share owned by your company, use this percentage to help to predict future sales.
Set Company Goals for the Next Fiscal Year, and Align Your Budget to these Goals
Set company goals for the next fiscal year. The goals for the year function as a high-level business plan, detailing certain benchmarks that the company wants to achieve. The budget must be closely aligned with these goals.
When establishing company goals, it is also important to look at the relationships among business factors. For example, if a company's goal is to increase profits through growing topline sales, it is important to determine what impact the extra sales volume will have on the workforce, on the product lines, or other costs.
The capabilities and limitations of the equipment and employees and a methodical analysis of material requirements, employee capability, and resource availability are also required. The budget must reflect the impact of the goals, relationships among business factors, and the related decisions.
5 Key Steps to Develop an Overall Budgeting Process for 2025
After defining and quantifying past and future trends and setting company goals, develop and document a budget process and budget model. Use a 5-step process to prepare the model that will be used throughout the organization.
1. Decide whether or not multiple budgets are required
Determine the number of different budgets that may be required based on different scenarios, but note that multiple budgets significantly increase the complexity of all of the budget preparation and tracking processes. A common example of a multiple-budget model has budgets based on worst-case, best-case, and mid-range assumptions.
2. Develop a Budget Process Outline:
Create an outline that defines the following:
- Which budgeting platform and tools to use?
- The submittal and review process.
- The budgeting level that needs to be monitored. For example, monitoring the budget at the lowest account level will require an entirely different process than monitoring the budget at the financial statement level.
3) Define Budget Guidelines
Overall, the budget guidelines will function as action plans and will allow the organization to adhere to the budget while achieving business goals. To define budget guidelines, develop an overall plan that achieves a certain percentage of revenue growth and appropriate cost reduction. For example, the guidelines should include the specifics of any revenue growth and the business plan to achieve the budget.
A budget merely describes numbers, while the budgeting guidelines function as the plan of action. For example, if next year’s budget reduces employee compensation by 5%, a potential guideline could be ‘to institute a hiring freeze’. Other guidelines may relate to salary changes, expected changes in foreign currency expectations, fluctuations in labor costs, and outsourcing costs.
4) Identify Key Budgeting Participants
Defining the key participants and their roles and responsibilities largely depends on the budgeting guidelines. The structure of the budget, whether created chiefly at the executive level, at the department level, or by every employee of the company, will determine what individuals need to be involved and committed to the process. Determining the key participants also depends on the structure of a company, the number of executives, the number of department heads, and the number of departments.
A related step is education, training, and acceptance of the value of the budget.
5) Establish a Time Frame for Budget Preparation
Determining the timeframe is the final step in developing the budget process. Ideally, the budget for the next fiscal year must be prepared, approved and implemented on the first day of that year, usually January 1st. It is helpful to work backward from this date to determine the key deliverables and deadlines that must be established. A detailed schedule can be helpful to define who is responsible for what and when specific items must be completed.
Key Budgeting Considerations for 2025
As you finalize your budget, keep in mind these key considerations specific to 2025:
- Economic Volatility: Factor in potential economic fluctuations and uncertainties. Build contingencies into your budget to adapt to unforeseen circumstances. Volatility also requires more proactive vigilance. Actual to-budget reviews should be performed with greater frequency so as to have a timely ability to react and adjust as the year unfolds.
- Technological Advancements: Evaluate the need for technology upgrades or investments to stay competitive. Allocate resources for digital transformation initiatives.
- Talent Acquisition and Retention: Consider the impact of labor market trends on your workforce costs. Budget for competitive salaries, benefits, and training programs.
Overall, an effective annual budgeting process that is aligned with company goals, past performance, and the environment will initiate a successful new year.
Feeling overwhelmed by the 2025 budgeting process? You're not alone. Many businesses struggle to navigate economic uncertainty and changing market dynamics. A Fractional CFO brings clarity and strategic guidance to your financial planning. Reach out to us now for a complimentary consultation and discover how a Fractional CFO can align your numbers and your strategy, providing the financial expertise you need for smooth sailing throughout the year. Don't miss this opportunity to elevate your business to new heights with a tailored budgeting approach!
