Which budget technique is right for your organization?

Budgeting is not one size fits all. The size of your organization may determine which technique fit bests. Try these techniques on for size.

For corporations to support fiscal responsibility and plan for the future, they often automate budget techniques that include planning, forecasting and strategy. As IT executives work on an automation plan with colleagues in staff and line functions, it is important to provide clear definitions of these functions and how they interrelate.


Early in adulthood, many people earn low salaries and struggle to make ends meet. So they create budgets for things like rent, entertainment and spending cash. They budget by month, quarter or perhaps for an entire year.

The same is true for corporations. For example, some of a professional services firm's budgeting may be horizontal -- say, for the buildings department -- but revenue and staffing may be vertical and vary by line of business, such as lines of business serving SAP clients, Oracle clients and Salesforce.com clients. As a starting point, therefore, budgets are built across these lines of business, administrative centers are added, and an entire budget is put together (spanning multiple line items).

Typical lengths of a budget cycle

For some corporations, the 12-month budget cycle is sacred, and executives are held accountable for the whole budget for the entire fiscal year. Other corporations recognize that certain key parts of the budget (e.g., size of the finance department) are easy to budget for the next fiscal year, but other parts can be highly variable. For instance, many companies begin forecasting the second quarter once the first quarter has been budgeted. This is often called a "rolling forecast," and the budget is rebuilt every quarter. The professional services firm needs the flexibility to expand its lines of business based on the size of its future volume.

Planning horizons. The following are rough assumptions about time horizons:

  • Budgeting -- 12 months
  • Planning -- year two through year four
  • Strategy -- year five and beyond

Again, these numbers are not set in stone but represent three interconnected efforts. Budgeting deals with the short term and is very detailed. Planning is less detailed, remains operational, and allows the company to look well beyond one year. Strategy is highly transformational and helps set new directions for the company.

Think of a plan and a budget as a continuum. For example, operational changes to be made in year two and beyond often require the expenditure of budget dollars today.

Planning techniques

Rolling forecasts are a planning technique, because the numbers "spill" into year two. This technique is as detailed as budgeting.

Developing year two plans and beyond. Companies may deploy the same approach to planning as with budgeting, with three important differences: 1.) There are fewer line items. 2.) The numbers tend to be quarterly, not monthly. 3.) The outputs are not subject to the same type of scrutiny as they are with the budget cycle.

For more on budgeting

Excel and the budget process

Definition of budgeting, planning and forecasting

Financial data and forecast models

Driver-based planning. Planning in one area is often closely tied to a "driver." The professional services firm requires that headcounts are closely tied to the company's future projection for client projects. Projects can be used as a driver for headcount.

Financial modeling. Financial modeling takes driver-based planning one step further and uses equations to support the planning process. For example:

Total staff = management staff + consulting staff + administrative staff

Consulting staff could then be broken into multiple areas, depending on the type of consulting.

Integrated business planning. The goal of integrated business planning is to help companies link different departments like sales, operations, human resources, etc. This provides another important link to manage planning.


Rolling forecasts, driver-based planning and integrated business planning are methods of forecasting. In addition, there are some classical forecasting techniques, which include:

  • Linear extrapolation -- The forecast develops at a linear rate (for example, the consulting revenue will grow at 10% per year).
  • Simple regression -- The forecast value depends on a single external variable.
  • Multiple regression -- The forecast value depends on multiple variables.

Simple and multiple regressions require a rich history of  the forecasts.


The development of strategy is critical for organizations, as they often look ahead five years or more. These strategies involve mergers, divestitures and major changes to products and markets. Some techniques that are used here include balanced scorecards and strategy maps.

New strategies have long horizons and affect the budget and planning cycles.

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