Knowledge and Insights
Budgeting seems to be going out of vogue in some company circles as financial markets, and the economy at large, is becoming increasingly volatile and more difficult to predict. In the place of budgets, companies have started to introduce rolling forecasts, flexible budgets and event-driven planning. These forecasting tools afford companies the opportunity to continue using a prospective financial tool without the rigidity of a traditional budget.
A recent business survey found that only 11% of companies are satisfied with their financial planning capabilities, and we venture to guess that the vast majority of unsatisfied companies are using a traditional budgeting process. Basically, companies become stuck in a budgetary quagmire whenever there are significant changes to the economic conditions related to the company. In these cases, a company budget may seem like a shackle to the company’s ability to react quickly to important developments that threaten the company’s stability.
Worse yet, is the time spent during the budget-planning process. Budgets are seldom something thrown together in a week – and accurate budgets never are. No, typically the budgeting process takes upwards of a month or longer, depending on the size of the organization and the complexity of the budget involved. This means that the information on which your budget is based is normally out of date by the time the budget is implemented. Couple that with the unpredictability of today’s economic forces, and you may be in for trouble.
The problem with getting rid of a budget is that most companies do not know what to use in its place to help predict their financial picture. Fortunately, we provide the answer. Rolling forecasts are similar to budgets in that they are predictive, but they are based on current numbers and forecast a set period of time from the current numbers. Instead of looking at the last calendar years’ worth of data, a rolling forecast looks at current data and uses such data to make a prediction about future performance. The benefits are that your prospective financial analysis is updated regularly, on current information, and remains adjustable should something change.
With the talk of eliminating your budget, you may also want to eliminate your calendar-year style of thinking for disbursements. One of the advantages of not budgeting any longer is that you can change when you disburse monies to various programs and departments within your company. This can be advantageous because oftentimes your beginning-of-year estimates do not comport with your actual needs at the end of the year. By divvying monies as they are needed, you stand a better chance of better spending habits as your departments will not be trying to game the budgetary system as this is much more difficult to do.
Of course, if you are not ready to ditch your budget, you can engage in activities that help you budget more accurately and adjust for discrepancies more quickly. Reviewing your budget monthly can help your business create processes to adjust to changes in conditions that were unexpected at the time the budget was drafted.
You may also adopt a hybrid system by not only continuing to budget but also by adopting a rolling forecast model. You can use your budget as your baseline and identify trends and changes in conditions as part of your rolling forecast. This gives you the hard, fact-based advantages of a budget but still allows you to make operational adjustments based on new trends and data uncovered as part of your rolling forecast.
Financial forecasting is one of the most important activities in which your business engages. Ensuring that the process is accurate and flexible oftentimes can spell the difference between profit and loss. The professionals in our office understand budgeting and can help you identify your company’s budget drivers and make recommendations as to budgeting policy and procedure. Call us today.