How to Build Budgets That Survive Reality

Companies conflate strategy, annual planning, budgeting, and forecasting - using them interchangeably when they represent distinct processes. Strategy defines where to play and how to win, annual planning translates strategic choices into targets, budgeting provides financial framework to support initiatives, and forecasting adapts expectations quarterly based on reality. ERP-driven budgeting fails because it lacks contract intelligence including renewal dates, alternatives considered, market pricing, utilization against commitment, and ROI comparisons. Effective planning requires contract-driven budgeting mapping decision points, deeper data collection beyond historical spend, opportunity fund frameworks reserving 10-20% for strategic flexibility, and continuous budgeting conversations.

Your budget assumes departments will spend predictably. 

But reality delivers a Slack renewal that auto-renewed three weeks before you could negotiate. An AI tool explosion that nobody forecasted. A critical vendor acquisition that changed your contract terms mid-year.

Your budget assumes you can plan technology investments annually. 

But reality requires decisions every quarter about tools that didn't exist during planning season, integration breakdowns that force emergency purchases, and competitive moves that demand immediate capability upgrades.

Your budget treats each department's spend as independent line items. 

But reality operates as interconnected systems where marketing's cost optimization breaks sales' integration strategy and IT's security upgrade forces procurement policy changes across every vendor relationship.

The major problem at play here is that more often than not companies conflate four completely different business processes: strategy, annual planning, budgeting, and forecasting. Michael Shields, Russell Lester, and Justin Etkin debate it all below.

Teams tend to use these terms interchangeably when they mean something entirely different. Worse, they look to the budget process to answer questions that should be resolved during strategy and planning. Then, instead of using budgets as financial guardrails for strategic choices already made, companies invert the process. They start with last year's actuals plus 10% and call it strategy. 

It's a recipe for mediocrity at best, disaster at worst.

The Fatal Flaw: When Budgets Drive Strategy Instead of Supporting It

Most finance leaders know this backwards approach is wrong, but they've been trapped in it for years. The sequence should be crystal clear:

• Strategy defines where you play and how you win. It's your fundamental choices about markets, products, and competitive positioning.
• Annual planning translates those strategic choices into specific targets and initiatives. It's the bridge between vision and execution.
• Budgeting provides the financial framework to support your planned initiatives. It's the resource allocation plan, not the strategic plan.
• Forecasting adapts your expectations based on reality throughout the year. It's your navigation system, updating quarterly or more.

But what actually happens is that finance teams jump straight to historical spend analysis, add some growth assumptions, and then ask, "What should our strategy be within these budget constraints?"

The result is what Russell Lester, Tropic’s President and CFO, calls "functional approach budgeting.” Each department operates in silos, optimizing for their piece while the overall system underperforms. It prevents businesses from reaching their potential.

The Contract Intelligence Gap: Why ERP-Driven Budgeting Fails

As Justin Etkin, Tropic’s COO and Co-founder talks about, a big evolution we’re seeing across customers is moving from an ERP and expense-based budgeting process to a contract and solution-based budgeting process.

In an ERP budgeting process, all you have is spend amounts, nothing more. You know you spent $200K on Salesforce last year, so you budget $225K for next year. But you're divorced from the critical intelligence that actually drives spending decisions:

• When does the contract actually expire?
• What alternatives were considered during the last negotiation?
• Are you getting fair market pricing?
• How does utilization stack up against commitment?
• What's the ROI compared to alternative investments?

Organizations are beginning to take a much more proactive stance on a contract-driven budgeting cycle. Instead of passive spend extrapolation, they proactively map key renewal dates and sourcing events. They know nine months in advance that a major technology decision will set their trajectory for years.

This shift from “reactive to proactive” budgeting changes everything. Suddenly you're not just managing expenses, you're actively managing decision points that shape your business capabilities.

The Data Problem: We're Not Collecting the Right Stuff

In his 25+ years in finance, Russell Lester has often seen that teams are not collecting the right data. They’re collecting a lot of historical data - like what we spent $X on. Now he’s not saying teams use peanut butter spread to figure out where we go from there, but procurement and finance can really help each other out by going one level deeper. Not only utilization, but understanding the ROI, as well as some of the trends for the software itself. It looks like this: 

• Level 1: Historical spend and basic utilization (most teams stop here)
• Level 2: ROI analysis, market benchmarking, and software trend intelligence
• Level 3: User satisfaction data, business impact measurement, and competitive intelligence

That helps us understand what impact this potentially can have, how satisfied we are with a particular supplier. Lester sees a lot of that tier one stuff, but doesn’t see a lot of those other two levels occurring. That impacts your forecast that you really, really need.

This deeper intelligence transforms budget conversations. Instead of "We spent $X last year, so let's budget $X plus growth," you're discussing "This investment drove Y% efficiency improvement and Z business outcome, so here's how we optimize it going forward."

Now, we're talking about budgeting mostly from a cost perspective here, but budgeting of course includes revenue and the overall operation of the business. But cost is a strong focus because it’s the area that we too often get wrong or don’t think about enough. It’s all interconnected. 

Building "Opportunity” Not “Slush” Funds: The 80/20 Rule for Strategic Flexibility

The idea of a Slush fund isn’t new - finance and procurement teams already know you need some wiggle room. But these Slush funds are usually for “emergencies,” and have a bad connotation. Instead, we need to not only rebrand “slush fund” but really look at where these funds should be going. You really need unallocated budget for the unexpected opportunities, not just crises. 

While it may seem uncomfortable at first, Lester suggests an approach that doesn’t budget every penny down to the last detail. Instead, apply an 80/20 framework: 

• Budget 80% of spend to known, necessary investments
• Reserve 20% for strategic opportunities, emerging needs, and yes, the inevitable surprises

The reserved funds might go toward:

• Opportunity investments: That AI tool that could 10x your product production, but didn't exist during planning season
• Crisis mitigation: Emergency vendor switches when your primary solution experiences security issues
• Market response: Competitive moves that require rapid technology deployment
• Efficiency gains: Consolidation opportunities that reduce overall spend while improving capabilities

You really need unallocated budget for the unexpected opportunities, not just crises. 

Most FP&A teams already do some of this, but they hide it in places like staffing assumptions and travel & entertainment estimates. The better approach is explicit opportunity funds that department leaders can request throughout the year, with clear criteria for allocation.

This of course is not bulletproof. The problem comes when market environments squeeze or outpace in a negative way beyond what you've stowed away. That's when you run into problems. But, you can get ahead of the game as much as possible. 

Budgeting vs. Forecasting and Why Forecasts Must Flex

“Do budgets even matter anymore?” That question was posed between a conversation with Lester and Tropic VP of Procurement, Michael Shields. It came from a good place - technology, markets, everything seems to be changing so quickly. 

How can you even look 12 months out and plan a budget and actually stick to, without falling behind? 

The answer is complex but two things to keep in mind first: 

1. If you're publicly traded, you simply have to give guidance to the market and a budget is absolutely critical for compliance standards for the board to approve and ratify your plan. 
2. But, even if you're privately held, there is the investor sentiment to remember. If you just get them to agree to fund the business on a quarterly cycle, it is too short-term a focus and you may not see far enough down the road to know if there is a liquidity issue or a missed opportunity.

Since we’ve established a budget is necessary, this then elicits another question Lester hears often after a budget has been set: “Should we adjust the budget?” No. 

The budget represents your annual commitment and strategic plan. It doesn't change just because reality unfolds differently than expected. But forecasts do change and should change. They must adapt constantly based on new information.

This creates natural tension: When you're running ahead of plan, how do you allocate found money? When you're behind, where do you reduce spend? 

These decisions can't wait for the next annual budget cycle - which is why we need all the steps of strategy - planning - budgeting AND forecasting. 

Forecasting or if we must include the word “b word” - "continuous budgeting" is then an always-on process of tracking contract expirations, renewal opportunities, and optimization possibilities. Instead of annual budget scrambles, you maintain rolling intelligence about upcoming decision points.

Finance teams that operate this way report dramatically less stress not only during budget season but throughout the year. They're having strategic conversations all the time instead of cramming everything into Q4 negotiations with department heads asking for "the moon."

Getting Procurement, Budget Owners, and Finance on the Same Team

The old paradigm sometimes positions procurement and finance as natural adversaries. Finance complained that "procurement surprises blow up budgets." Procurement countered that "finance doesn't understand the reality of software buying."

One person even said "Budget season becomes procurement's annual humiliation ritual." It gets to whether procurement is a noun or a verb. Procurement, the noun, the team, the role is often owned by finance. 

But procurement as the action of buying things that you didn't plan to buy absolutely does blow up the budget and can be the villain.

So, we need a new paradigm that flips this dynamic entirely. Progressive organizations involve procurement teams early in budget planning, not as afterthoughts. Procurement and/or budget owners bring:

• Contract intelligence: Visibility into upcoming renewals and decision points
• Market intelligence: Benchmarking data and negotiation insights
• Vendor relationships: Understanding of supplier priorities and flexibility
• Risk assessment: Identification of potential disruptions or opportunities

When finance and those doing procurement collaborate from the start, budget conversations shift from "Please don't surprise us" to "Here's what we should prepare for strategically."

AI and the Budget Explosion: Planning for Transformational Unknowns

Here's a crazy statistic: There are over 250 distinct budgeting and forecasting tools in the market. That means if you are someone that owns budgeting, if you're a finance practitioner, you could use a different tool every single working day of the year.

Now, we can only imagine what that same statistic is for marketing, sales, security, engineerings tools, etc. 

And, everything is already exploding with AI. Only 15% of AI decision makers reported an EBITDA lift for their organization in the past 12 months. Fewer than one third can tie the value of AI to any P&L changes.

The majority of the value capture is actually happening with the humans rather than the businesses. Does that additional efficiency get redeployed into the business? Or do people just go hit some golf balls? That’s hard to measure right now. 

AI is not a full job replacement solution, yet. It's more of a job enhancement solution right now. You can make super powerful people, or unlock superpowers for people to become super humans in their day to day. But you can't replace them fully.

There may not be a complete solve for this. But, the traditional approach to create an "AI budget line item" and hope for the best, is not the answer.

Instead, you need to at least establish evaluation criteria, pilot processes, and clear ROI metrics before the spending requests start flooding in. Organizations getting ahead of this are creating separate budget pools for:

• Transformation investments: Large bets that could fundamentally change operations
• Enhancement opportunities: AI add-ons to existing tools that improve efficiency
• Exploration budgets: Small pilots and proof-of-concept investments

Without this framework, AI spending becomes reactive and scattered. With it, you can make strategic choices about which AI investments align with your where-to-play and how-to-win decisions.

Your 90-Day Budget Strategy Transformation

Operating without a budget fosters a "free-for-all" mindset, leading to a lack of discipline in spending and poor stewardship of the business. 

Budgets are necessary, but they should not drive strategy. They can be a constraint against just doing anything and everything, but they need to flow in sequence as a handoff from the annual planning process.

If you’re ready to stop letting budgets set your strategy. Here's your roadmap:

Month 1: Strategic Foundation

• Document your actual strategy (where to play, how to win)
• Map current spend to strategic priorities
• Identify functional silos and system interdependencies
• Audit upcoming contract renewals and decision points

Month 2: Intelligence Gathering

• Implement contract-driven budgeting for major technology categories
• Establish deeper data collection (utilization, ROI, user satisfaction)
• Create opportunity fund framework and allocation criteria
• Align finance and procurement on quarterly forecast processes

Month 3: Process Integration

• Launch continuous budgeting conversations with department leaders
• Establish monthly spend variance analysis focused on strategic impact
• Create cross-functional technology investment review process
• Build early warning systems for contract renewals and optimization opportunities

This is just a roadmap. Of course getting to the right point is going to take a lot of work, but it can be made a lot easier when you’re thinking about it correctly. The goal isn't perfect budget accuracy, it's strategic alignment and adaptive intelligence.

Bringing it All Together 

How a company views procurement says a lot about how it will also face the budgeting process.

If where you're spending money is disconnected from how you're prioritizing growth, you're guaranteed not to achieve that growth.

The only way to ensure survivability through uncertainty is to begin with fiscal stewardship. Before diving into tactics, consider how your business treats resource allocation: team sport or silos? Centralized or decentralized? Data-driven tradeoffs or emotional decisions?

Start with strategy first. Strategy is about where you play and how you win. Annual planning translates those choices into targets and initiatives. Then the budget supports that. But most people invert it and start with the budget to answer what strategy should be.

The budget is set annually. The forecast changes quarterly. Have flexibility built in for found money deployment and clawback decisions that can't wait for next year's budget cycle.

Not all bets pay off. Some should no longer be made. Markets change, priorities shift. That doesn't mean the plan was wrong. It means we're not operating in a static universe.

Instead of approaching budget season with dread, view it as your annual opportunity to ensure the business is grounded, clear, data-led, and focused on what matters most. It's your chance to align spending with strategy and ensure that every dollar reflects a deliberate choice ahead.

Spend management isn't a tactical checkbox. It's the tip of the spear. For finance leaders ready to lead, there's never been a better time to change the mindset and treat budgeting that way.

Frequently Asked Questions About Planning, Budgeting, and Forecasting

How do I implement contract-driven budgeting?

Start by mapping all major technology contracts with renewal dates, current spend, and decision windows. Work with procurement to layer in contract intelligence including when alternatives were last evaluated, current market pricing benchmarks, utilization data, and stakeholder satisfaction scores. Create a rolling 12-month renewal calendar identifying decision points requiring advance preparation. Shift budget conversations from "what did we spend" to "what decisions are we making and when," enabling strategic sourcing events 6-9 months before renewal deadlines. This proactive stance transforms budgeting from passive spend extrapolation to active capability management aligned with business strategy.

What data should finance teams collect beyond historical spend?

Move beyond Level 1 data of historical spend and basic utilization to Level 2 including ROI analysis, market benchmarking, and software trend intelligence. Progress to Level 3 encompassing user satisfaction data, business impact measurement, and competitive intelligence. This deeper intelligence transforms budget conversations from "We spent $X last year, so budget $X plus growth" to "This investment drove Y% efficiency improvement and Z business outcome, enabling optimization decisions going forward." Most teams stop at Level 1, but Levels 2 and 3 provide forecasting accuracy and strategic insight enabling CFOs to defend investments with measurable outcomes rather than historical precedent.

How much budget should I reserve for unallocated opportunities?

Apply an 80/20 framework budgeting 80% of spend to known necessary investments and reserving 20% for strategic opportunities, emerging needs, and inevitable surprises. Reserved funds address opportunity investments like AI tools that didn't exist during planning season, crisis mitigation requiring emergency vendor switches, market response demanding rapid technology deployment, and efficiency gains through consolidation opportunities. Frame this as strategic preparedness rather than financial sloppiness by showing executives previous year examples where inflexible budgets prevented capitalizing on opportunities or responding to crises. Most FP&A teams already build buffers into staffing and travel assumptions; explicit opportunity funds with clear allocation criteria provide better governance.

Should I adjust the budget mid-year or only the forecast?

Never adjust the annual budget mid-year—it represents your annual commitment and strategic plan ratified by the board. Forecasts must change constantly adapting to new information, but budgets remain fixed providing the baseline against which performance is measured. This creates natural tension when running ahead of plan requiring found money allocation decisions or behind plan necessitating spend reduction choices that cannot wait for next annual budget cycle. Implement continuous budgeting as an always-on process tracking contract expirations, renewal opportunities, and optimization possibilities, maintaining rolling intelligence about upcoming decision points enabling strategic conversations throughout the year rather than Q4 scrambles with department heads requesting "the moon."

How do I budget for AI when ROI is unclear?

Only 15% of AI decision makers reported EBITDA lift in the past 12 months, with fewer than one-third tying AI value to P&L changes because value capture happens with individual employees rather than organizations. Instead of creating generic "AI budget line item" hoping for the best, establish evaluation criteria, pilot processes, and clear ROI metrics before spending requests flood in. Create separate budget pools for transformation investments as large bets fundamentally changing operations, enhancement opportunities as AI add-ons improving existing tool efficiency, and exploration budgets for small pilots and proof-of-concept investments. This framework prevents reactive scattered AI spending while enabling strategic choices about which AI investments align with where-to-play and how-to-win decisions.