How planning, budgeting and forecasting runs, step by step

The cycle starts with finance setting the rules, moves through drafting and approving budgets, then turns those budgets into operating targets. Forecasts update the outlook each period, and variance analysis compares actuals to both. Each step hands an artefact to the next, and gaps usually appear at those handoffs.

The steps in order

1. Set budget policies and the planning calendar. The planning lead drafts this and the finance director approves it. It covers who owns which lines, approval thresholds, how headcount is costed, and which assumptions are fixed centrally. Hands on: a budget pack with templates, central assumptions, account mappings and deadlines.

1. Issue targets and guidance. The executive team sets the ambition for revenue, margin and cost. Hands on: a target for each business unit or cost centre, plus any constraints such as a hiring freeze.

1. Draft unit budgets. Budget holders build their numbers. Finance business partners sit alongside them, check the logic and keep them inside the templates. Hands on: draft submissions with the assumptions behind them written down.

1. Consolidate and challenge. The planning team rolls the drafts up, eliminates internal charges and compares the total to the targets. Hands on: a consolidated draft and a list of gaps, each with an owner.

1. Review and approve. Executives resolve the gaps, often through more than one round. The board or its delegate signs off. Hands on: an approved budget, locked as a named version that nobody edits afterwards.

1. Load and put the plan to work. Finance systems staff load the approved version into the planning tool and the ledger. Budget holders turn their numbers into hiring plans, purchasing limits and activity targets. Hands on: budget lines tied to cost centres, and spending authority that matches them.

1. Record actuals cleanly. The accounting team closes the books. They post accruals for revenue earned but not yet billed, reconcile revenue and fix errors with adjustments. Hands on: reconciled ledger balances that the planning team can trust.

1. Prepare the forecast. The planning team updates the outlook with budget holders, using actuals to date and current expectations. Treasury builds the cash flow projection from the same view and flags unusually large receipts and payments coming up. Hands on: a current forecast version and a cash projection.

1. Analyse variances. Business partners explain the gaps between actuals, forecast and budget. Before anything is reported, someone confirms each reported figure traces back to a ledger balance. Hands on: variance commentary with causes, not just descriptions, and proposed actions.

1. Act and feed back. Management agrees what to do about each material variance. Owners carry the actions out. Lessons about weak assumptions go back into the next set of policies. Hands on: revised assumptions for the next forecast and the next budget cycle.

Where the handoffs break

Most trouble sits between steps, not inside them.

The handoff from step 5 to step 6 is a common weak point. The approved budget lives in a spreadsheet, the loaded budget lives in a system, and the two drift apart through manual rekeying. Variance reports then compare actuals to a number that was never approved.

Step 7 to step 8 fails when the close runs late or accruals are thin. Forecasters then work from incomplete actuals and quietly fill the gaps themselves.

Step 9 to step 10 fails when commentary explains what moved but not why. Without a cause, there is nothing to act on, and the same variance reappears next period with the same explanation.

The cash projection and the operating forecast often come from different teams using different assumptions. When they disagree, nobody owns reconciling them.

Questions to ask the people who run it

The documented process and the real one are rarely the same. Ask the people doing the work:

• Which version of the budget do the variance reports compare against, and who confirmed it matches the approved one?
• Where do budget holders actually build their numbers? Is it the template, or a private spreadsheet that gets pasted in at the end?
• Which assumptions get overridden after the central pack goes out, and who allows it?
• When the close slips, what does the forecast use for the missing actuals?
• Who checks that reported figures trace to the ledger, and what happens when they do not?
• How does treasury get the operating forecast, and how often do the two views disagree?
• Which variance actions from last period were completed, and who tracks them?
• What workarounds would break if the planning tool or the templates changed?
• Who can approve spending beyond the budget, and is that written down anywhere?

Listen for the informal steps. A business partner who calls each budget holder before the deadline, or an analyst who keeps a reconciliation file outside the system, is often holding the process together. A redesign that removes them without replacing what they do will show up as worse forecasts within a cycle or two.

What to protect when changing it

Keep a single locked approved version. Keep the link between reported numbers and ledger balances. Keep named owners at every handoff, because a step without an owner is the one that stops happening first.

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.