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 introduced 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. Companies become stuck in a budgetary quagmire whenever there are significant changes in 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 developments that threaten the company’s stability.
Worse yet, is the time spent during the budget-planning process. Managers seldom build their budgets in a week and they are often inaccurate. 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 This means that the information on which your budget could be outdated by the time it is implemented. Combine that with the unpredictability of today’s economic forces and you may face unexpected challenges.
The problem with eliminating a budget is that quite a few companies do not know what to utilize in its place as a financial forecaster. Some businesses have employed rolling forecasts, which are similar to budgets in that they are predictive. However, they are based on current numbers and forecast a set period based on these numbers. Instead of looking at the last calendar years’ worth of data, a rolling forecast looks at current data and applies such data to formulate a prediction of future performance. This methodology regularly updates your prospective financial analysis based on current information and it remains adjustable should conditions vary.
When considering the elimination of your budget, you may also want to rethink your calendar-year style method of disbursements. One of the advantages of not budgeting is that you can adjust when you disburse monies to various programs and departments within your company. This can be advantageous for the reason that oftentimes your beginning-of-year estimates do not comport with your actual needs at the end of the year. By divvying monies as needed, you stand a better chance of better spending habits as your departments will not attempt to manipulate the budgetary system as this is much more difficult to do.
However, if your business is not ready to eliminate its 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 varying conditions that were unexpected when you put the budget together.
You may also adopt a hybrid system that combines budgeting with a rolling forecast model. Use your budget as your baseline and identify trends and changes to business situations as part of your rolling forecast. This gives the hard, fact-based advantages of a budget but still allows you to implement operational adjustments based on emerging trends and data uncovered as part of your rolling forecast.
Financial forecasting is one of the more significant activities in which your business engages. Ensuring that the process is accurate and flexible oftentimes can spell the difference between profit and loss. Our professionals have the experience and resources to assist with your budgeting needs. We can identify your budget drivers and make impactful recommendations for budgeting policy and procedures. Call us today.