Financial Planning & Analysis

A Look at Budgeting and Forecasting Through Uncertainty

Uncertainty can take many forms. It may manifest as a natural disaster, the deterioration of a foreign currency in which your company has operations, geo-political changes, the merger or acquisition of a competitor or a global pandemic. Regardless of form, uncertainty does illuminate a certain truth: companies must face volatile business conditions with nimble planning, budgeting and forecasting.

Most companies find budgeting a challenge even under stable conditions. The process is often cumbersome, with managers spending too much time trying to work to a budget that is forced upon them. When economic forecasts fluctuate on a weekly or even daily basis, creating one reliable budget to coordinate business units and track performance for an entire fiscal year is extraordinary. Following the traditional budget process will likely prove unproductive.

Alternatives to Annual Budgets

Scenario Planning

In more stable times, the budget process is often a consensus building exercise. Some companies may also plan for “worst-case” scenarios. Companies can speculate about various negative scenarios and assemble a budget or plan that they believe will address these events. This process isn’t agile enough to respond to sudden or unexpected changes in the economy. It is more of a “what-if” plan with little basis in what is actually occurring. In the end, a company is still left with an annual budget. They just have different options to choose from. (Learn more about sensitivity and scenario analysis.)

Zero-based Budgeting

Many current budgets are based on past ones, with incremental changes to adjust for inflation or specific business trends. Zero-based budgeting starts with prioritizing operating and capital expenditures and aligning them with the company’s strategy. This approach can add time to an already long process because you are taking a deep dive into all of your expenditures. It therefore should only be used in areas with the highest potential savings (e.g., capital spending and costs such as procurement). It is useful to identify the organization’s largest costs and determine which of them can be realistically cut. Employee costs or costs for real estate may be inflexible and hard to change. Other items like marketing costs or capital expenditures can be reset at the beginning of each year.

Rolling Forecasts

Companies often prepare informal forecasts on a monthly or quarterly basis. This is often performed by members of the finance department. The forecasts may not be tied to active decisions going on within the organization. Often times they are just updated projections of year-end values. To get the most out of a rolling forecast, a company should formalize a process where they examine a 12- to 18-month rolling forecast with a focus on the most important financial variables. This approach increases the visibility into trends and helps when the forecast starts to diverge from actuals. If the CFO can engage the CEO and other top executives to identify gaps and discuss how to close them, this type of budgeting can make managers more accountable as there is a regular examination on performance relative to forecast.

Quarterly Budgeting and Forecasting

In periods of much uncertainty, some companies move away from long-term goals and concentrate on the next three months. Companies under that much strain, especially those in a turnaround situation, should consider abandoning annual budgets and switch to budgeting on a quarterly basis. These companies should focus on cost-cutting measures and managing their working capital for near-term needs. (Get our 13-week cash flow guide to learn more.) This short-term approach allows companies to allocate their resources in real time and make better forecasts as their horizon is much shorter. It is also easier to review their performance and see what is and isn’t working.

Learn about cash flow forecasting in our video Q&A:

Other Considerations for Budgeting and Forecasting

Key Metrics

At a time when the business environment is rapidly changing, companies should take the time to review key performance indicators (KPIs). The short-term focus on cash and expense management requires the reevaluation of the metrics that are used to track the business. Prioritizing metrics that focus on liquidity and working capital, and shifting away from revenue and growth metrics, may be a wise idea in uncertain times.

Compressed Timeframe

The finance team should look for ways to compress the budgeting and planning process so more time can be spent managing the business. Having a more collaborative approach can reduce the number of budget revisions and give all parties a better understanding of cost drivers.

Level of Detail

If an existing budget needs updating, the update doesn’t need to be at the same level of detail as the original budget. Department managers may spend too much time trying to reproduce detailed budgets when speed is more important. This will result in not getting bogged down in too many details, which will prolong the process and tie up valuable time and energy.

Budgeting and Forecasting Tools and Infrastructure

One critical element of maintaining a forecast in real time is the tool you are using to collect and aggregate the budget and forecast data. While Excel is a favorite and universal tool among finance and accounting teams, it has limitations on keeping data updated accurately and efficiently. Spreadsheets may be saved in different locations; lack of version control may mean executives are not looking at the most current numbers; and formula errors can lead to time lost looking for issues when the numbers don’t balance. With an ever-increasing remote workforce, you want a solution that’s accessible from any remote location and internet connection. The selection of a cloud-based planning, budgeting and forecasting solution and the integration of these capabilities with business intelligence and business process management systems plays a crucial role in the ability to efficiently create and communicate a budget.

Get Budgeting and Forecasting Support

Our team of finance and accounting consultants can deploy to help you improve budgeting and forecasting, and we can serve in interim financial management or project execution capacities as needed. If you’d like to learn more, visit our financial planning and analysis service page.

You can also download our guide for operating executives for insight into what to expect in your 13-week cash flow forecast by clicking the button below:

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