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You’re not in the business of budgeting

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Kevin Phillips believes that annual budget cycles are no longer fit for purpose and it’s time companies developed a more flexible and agile process.  

17th Nov 2021
CEO IDU
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With all the inevitability of winter following autumn, budget season is here again. And while there is no doubt that a solid, well thought through, nuanced budget and financial plan are critical contributions to the success of any organisation, I wonder whether we’re still going about budgeting and planning in the best possible way for today’s world.

I’m an accountant by training and profession, so it’s baked into my DNA that budgets are a mainstay of any business.

Without teaching you to suck eggs, how can you possibly proceed without a plan that translates business strategy into priorities and a timeline, and then allocates resources to each activity?

You’d be adrift as an organisation, with no idea of whether you expect to make a profit or not in the next year.

Should you start listing vacancies for new positions or should you start preparing for smaller teams? Should you open or close factories, stores or offices? Are your product lines still in demand and profitable, or have they had their day and need to be shuttered in favour of something more relevant and profitable? How can you evaluate if an opportunity – say renting more office space, or sub-letting some of your existing space – is favourable or not if you have no yardstick by which to measure it?

Your budget pulls all your strategic plans and targets together and adds financial signposting to the roadmap. This undoubtedly needs to happen.

The when and the how of budgeting

So, I certainly don’t question the what and the why of a budget. What I think we should all question is the when and the how.

Let’s start with the when. We need to seriously consider whether the annual budget cycle still serves us, or whether our businesses would be better supported by more frequent budget cycles: quarterly or even monthly with the built-in flexibility to adjust even more quickly.

Yes, the pandemic exacerbated and accelerated this disconnect between the cadence of our budget cycles and the reality of the world we operate in, but it was coming anyway and this trend will not reverse.

I have written previously about the short shelf life of information, and how this, in a post-pandemic world, is being exacerbated by global trends and events such as supply chain disruption, political instability and digitalisation. Annual budget cycles are no longer fit for purpose.

Let’s turn to the how of budgets then. If we’ve agreed that although budgets remain vitally important, the frequency at which they are carried out needs to speed up dramatically for budgets to not only serve their purpose, and also to offer a significant competitive advantage to your organisation in an unpredictable world.

But if your process takes you three months to produce a budget every year, you simply won’t be able to support a more frequent budget cadence. Your organisation would grind to a standstill with everyone tied up in the work of producing budgets.

After all, you’re not in the business of producing budgets. You’re budgeting for your business.

Budgeting for your business

Companies which were able to delink their budget and planning processes from a 365-day cycle – down to as short as a month in some cases – gave themselves the flexibility and resilience to weather the pandemic, and enter a growth phase faster.

Of course, this is something of a chicken and egg situation, to do this, you need a develop a flexible and agile budget process in the first place.

This is where you need to tap into the ability of technology to make this speed of work possible. You’ll be doing what you’ve always been doing, but you’ll have the agility, flexibility and efficiency to do it faster and more often. Plus you’ll improve how you budget, with more accurate, real-time information underpinning your assumptions.

While the activity, principle and product of the budgeting and planning process remain the unshakable bedrock of the finance function, I would suggest we start to reconsider some aspects of what we do.

While we might have previously considered the annual cadence of budgets as part of this bedrock, the world has moved on and we might be getting left behind.

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By Agutter Accounts
21st Nov 2021 19:53

As a management accountant by background, I would say a budget is a guide only as to what you expect to happen in a business over the budget period. You can have rolling budgets that get updated at periods less than a year if that is found to be useful.

But a budget is only of any use as far as I am concerned if you do monthly management accounts with variance analysis. And you can update your projects by doing an outturn analysis using the most up to date information. Budgets always go out of date and projections can simply be overtaken by events.

Used properly management accounts are a powerful tool in understanding your business and how it is performing. Unfortunately, too many companies just do not do that.

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