Alternatives to Traditional Budgeting for Optimizing Financial Management in Mid-Market Companies

Alternatives to Traditional Budgeting for Optimizing Financial Management in Mid-Market Companies 

In an uncertain economic context, the classic annual budget model shows its limitations for financial steering in mid-market companies. According to a recent study, 78% of companies consider their budgeting process too long and time-consuming, and only 30% achieve their objectives with a margin of error below 5%. To gain financial agility and performance, it’s time to explore new approaches. 

Indeed, agile management of financial resources is essential to optimize budget allocation and ensure the sustainability of mid-market firms. The challenges are many: responsiveness to market changes, cost control, prioritization of strategic investments, team motivation… So many challenges that the traditional budget struggles to meet. 

The Limits of Traditional Budgeting 

The annual budget no longer meets the needs of today’s mid-market companies in terms of financial management. Established once a year on often outdated assumptions, it does not allow adapting to rapid market changes. Companies spend an average of 4 months per year on this tedious process, which mobilizes many resources without providing the necessary flexibility. 

Concretely, this budget model has many disadvantages for optimizing financial management: 

• A lack of responsiveness to hazards and opportunities (changes in raw material prices, currency fluctuations, new projects, etc.), which can jeopardize financial balances. 

• Excessive consumption of resources, to the detriment of value-creating activities. Finance teams spend more time building and monitoring the budget than analyzing performance drivers. 

• Demotivation of operational staff, who perceive the budget as a bureaucratic exercise disconnected from the field, and who have no leeway to seize opportunities during the year. 

• A focus on the short term, which hinders strategic decision-making and optimization of financial resources over the long term. 

Take the example of an industrial mid-market company that built its forecast budget on an assumption of stable steel prices. If this price soars during the year, the company must review its investment plan and cut its margins, with no possibility of adjusting its initial budget. The entire value chain is impacted, from R&D to sales and production. 

4 Alternatives to Optimize Financial Resources Management 

1. Rolling Forecasts: Sliding Budget Projections 

Rolling forecasts consist of regularly updating financial projections, over a 12-to-18-month horizon. Rather than freezing the annual budget, mid-market companies thus adjust their budget projections continuously, based on changes in the market and their activity. According to a KPMG study, 63% of companies that have adopted rolling forecasts have improved their responsiveness to change. 

Concretely, the rolling forecast is based on a sliding horizon, with a monthly or quarterly update of budget forecasts. Finance teams focus on a limited number of key indicators, such as revenue, margin or working capital. They closely involve operational staff to challenge forecasts and integrate business trends. 

This approach allows for continuous optimization of financial resource allocation. For example, if a promising new project emerges during the year, the company can decide to reallocate part of its budget to finance it, with full knowledge of the impact on its financial balances. Budget management gains in agility and relevance. 

For an effective rolling forecast, it is recommended to: 

• Focus on the main drivers of the business (sales volume, selling price, unit costs, etc.) and their sensitivity. 

• Involve operational staff alongside finance, through co-construction workshops and regular exchanges. 

• Leverage digital tools to automate data collection, make budget forecasts more reliable and monitor achievements. 

• Compare different scenarios to assess financial impacts in case of favorable or unfavorable business developments. 

2. Zero-Based Budgeting: Starting from a Blank Page 

Zero-based budgeting (ZBB) resets the counters to zero each year. Each expense must be justified and validated according to strategic objectives, without being based on history. This method promotes cost optimization and allocation of financial resources to high value-added actions. According to Bain & Company, companies applying ZBB reduce their costs by 10-25% on average. 

The ZBB approach consists of analyzing the relevance and efficiency of each budget line in relation to the company’s priorities. The key questions to ask are: is this expense essential? Does it contribute to our strategic objectives? Can we reduce or eliminate it without negative impact? Are there more efficient alternatives? 

Take the example of travel expenses. With ZBB, it’s not a matter of renewing the previous year’s budget, but of questioning the merits of each trip: is it necessary for the customer relationship or can it be replaced by a video conference? Can we optimize costs by negotiating rates or pooling trips? 

This overhaul of expenses has many advantages for financial management: 

• Prioritization of investments according to their expected impact on financial and non-financial performance. 

• Empowerment of managers, who must defend each budget line and commit to specific objectives. 

• “Smart” cost control, which is not limited to blind budget cuts but seeks efficiency at all levels. 

• Dynamic allocation of financial resources, with the possibility of reallocating savings made during the year to new projects. 

ZBB is particularly relevant for mid-market companies in a phase of transformation or seeking budget efficiency. It requires strong sponsorship from general management and buy-in from managers, who must step out of their comfort zone. Support from experts and team training are key success factors. 

3. Participatory Budgeting: Involving Employees 

With participatory budgeting, budget development involves all employees. This approach enhances transparency, accountability and commitment. It aligns financial objectives with operational and strategic issues. A Harvard Business Review study shows that companies practicing participatory budgeting have better financial performance and more satisfied employees. 

Participatory budgeting can take different forms depending on the company’s culture and maturity. This ranges from simply consulting operational staff upstream of the budget process to co-constructing the budget via collaborative workshops. Some companies go so far as to allocate part of the budget or investments based on employee proposals. 

For example, an IT services SME can involve its engineers in developing the R&D budget, asking them to identify emerging technologies and innovative projects. In parallel, it can organize an internal “hackathon” to bring out bottom-up ideas for process optimization or customer experience improvement, with funding for the best projects at stake. 

This approach has multiple benefits for financial management: 

• Better alignment between strategy and operational execution, thanks to a shared vision of priorities and necessary resources. 

• Empowerment of employees, who feel they are actors in financial performance and are encouraged to propose value-creating initiatives. 

• Allocation of financial resources as close as possible to the field, taking into account real needs and business opportunities. 

• A dynamic of innovation and continuous improvement, nourished by collective intelligence and diversity of points of view. 

Participatory budgeting requires management based on trust and the right to make mistakes. It also involves training employees in the fundamentals of financial management and setting up appropriate facilitation rituals. The role of the finance department evolves towards more pedagogy and facilitation. 

4. Beyond Budgeting: Flexible Financial Management 

Beyond Budgeting goes even further by eliminating the annual budget. This disruptive approach focuses on ambitious long-term goals and flexible management of financial resources, based on trust and team autonomy. According to CIMA, Beyond Budgeting companies are more agile and resilient. They free themselves from the annual budget straitjacket to focus on creating sustainable value. 

Beyond Budgeting is based on key principles: 

• Subsidiarity: decisions are made as close as possible to the field, by empowered and autonomous teams. 

• Continuous adjustment of objectives and resources based on achievements and market developments. 

• Performance evaluation based on value created for customers and stakeholders, not on budget compliance. 

• Transparency and real-time information sharing, to allow everyone to make the best decisions. 

Concretely, Beyond Budgeting involves a profound rethinking of the management model and corporate culture. Managers become leaders who set a direction and framework, but let their teams find the means to get there. Ex-post control replaces ex-ante control. Financial management becomes more flexible and dynamic, with monitoring of cash flows rather than budget variances. 

Among the pioneering companies of Beyond Budgeting, we can mention the Danish industrial group Handelsbanken. Since the 1970s, this mid-market company has eliminated budgets in favor of a decentralized organization in small autonomous units. Each entity is responsible for its financial performance, measured by key indicators such as customer satisfaction or return on capital employed. This approach has allowed Handelsbanken to weather crises with remarkable strength and create more value than its competitors. 

While Beyond Budgeting may seem radical, it is inspiring more and more mid-market companies concerned with gaining financial agility and accountability. Its implementation requires a strong commitment from general management and long-term support. Companies can start by experimenting with certain principles on a limited scope, before generalizing the approach. 

The Benefits of Digital for Mid-Market Financial Performance 

To successfully implement these budgetary alternatives, mid-market companies must rely on powerful digital solutions. Management tools, such as those offered by Talentia, automate processes, facilitate collaboration and provide real-time visibility on key financial performance indicators. Gartner estimates that companies investing in financial technologies boost their productivity by an average of 24%. 

Concretely, new generation financial management solutions offer advanced features: 

• Automation of financial data collection and consolidation, for increased reliability and speed. 

• Collaborative workflows to involve operational staff in budgeting and forecasting processes. 

• Customizable dashboards to monitor KPIs and analyze variances in real time. 

• Simulation tools to project the financial impacts of different scenarios and optimize decision making. 

For example, an industrial mid-market group deployed an integrated financial planning and management solution in its 10 subsidiaries. By automating data feedback and allowing monthly re-forecasts, the company gained 20 days on its budget process and made its forecasts more than 95% reliable. Finance teams now spend 30% of their time analyzing performance, compared to only 10% before. 

Beyond productivity gains, digital tools are powerful levers for optimizing the allocation of financial resources. They allow real-time simulation of the financial impact of different strategic options and arbitration based on objective criteria. They also provide 360° visibility on financial performance, to quickly identify improvement levers and take corrective measures. 

According to a PWC study, the most digitally mature companies in finance achieve on average: 

• 20% savings on their financial operating costs 

• 25% productivity gains on transactional activities 

• 15% improvement in the quality of financial forecasts 

To fully leverage these solutions, mid-market companies must also invest in upskilling their finance teams. Beyond technical mastery of tools, it’s about developing new consulting and analysis postures, to inform strategic decision-making. The finance function becomes a true business partner, challenging operational staff and supporting them in optimizing performance. 

Conclusion 

Faced with the limitations of the traditional budget, mid-market companies have every interest in adopting alternative approaches to manage their financial performance in an agile way. Rolling forecast, zero-based budget, participatory budget or Beyond Budgeting: each company must choose the method that best suits its culture and challenges. 

But beyond the technical aspects, adopting a new budget model is a real transformation project, which requires top-level support and adapted change management. It’s about changing mentalities, breaking down silos between finance and operations, empowering managers… 

Finance teams are on the front line to drive this transformation. They must develop new skills, particularly in terms of data analysis, communication and influence. They also have a key role to play in spreading a common financial culture and making financial performance everyone’s business. 

At a time when companies are expected to contribute to society and the environment, this transformation of the budget model is also a great opportunity to put finance at the service of global and sustainable performance. By integrating CSR criteria into financial forecasts, directing resource allocation to positive impact projects, steering shared value creation… Finance professionals have a major role to play in reconciling economic performance and corporate responsibility. 

Alternatives to the traditional budget thus open up a field of possibilities for mid-market companies concerned with combining agility, performance and purpose. It is up to financial leaders to dare to shake up habits, experiment with new approaches and embark their teams on this exciting and forward-looking adventure. Transforming a budget exercise often perceived as a chore into a real lever for strategic management and collective mobilization is at this price. But the game is definitely worth the candle !