Budgeting & Forecasting
There are few people in an organisation who jump for joy when they know that the budgeting cycle is about to begin. Many see it as a task they need to get done for the Finance team rather than ‘owning’ their budget themselves.
Some play the game knowing that whatever they put up for their department will be trimmed by 10% so they add 10% to their submission to get the answer they want.
If incentives are based upon a sales number, they will submit the lowest number they can get away with so outperforming the target is easier.
All of these behaviours can occur when the purpose of the budget is not well understood (even by the Executive team) and suitable guidelines haven’t been set and communicated ahead of time.
For a process than can take up to a quarter or more of the year from start to finish, it is very important to understand the “why” and whether that time can be spent more productively. We can assist by:
- Ensuring the organisation understands the purpose and drivers for setting a budget (the WHY) eg:
- because we have always done it – is not a great reason!
- because our board tells us to do it – what is their driver?
- to live within cash constraints
- create the benchmark upon which to set performance incentives
- create a stretch target to push the team to try harder than last year etc.
- Different stakeholders have different drivers for creating a budget. It is important to understand those drivers and the potential behavioural implications of those
- Determining whether the budget process matches the reasons for creating one. For example, if a budget owner is not held accountable for their budget, is there much point in asking them to set it? Why include numbers in a department budget which the manager has no control or influence over?
- Eliminating waste and unnecessary activity if a process does not add value to achieving the purpose of the budget
- Training new budget owners and updating existing owners
- Considering whether a rolling forecast updated on a quarterly basis may be more appropriate to implement than a static 12-month budget. Commonly the rolling forecast can be used as a complement to the budget.
- Ensuring the assumption sets behind the budget are documented. It is very difficult to explain why an actual variance to budget has occurred, unless the assumptions upon which the budget was based is recorded.