Last week the UK government announced its annual budget. This is the time where the government in power will typically make changes to the way its citizens and businesses are taxed. This usually involves increases in fuel, drink, and tobacco duty; adjustments to personal and business allowances; and a raft of announcements on public expenditure. Analysts and commentators will then go through the numbers and come up with various scenarios on how the budget will change lives for individual groups and businesses. Like the company budget process, the government’s Budget announcement is something of a ritual, where most changes are already known, and the overall effect doesn’t seem to alter the way things are. But this budget was different. Some of the changes were a surprise, and for certain sections of the population, will have a great impact on their lives. For example, those people with a pension plan, can now take it all out as cash when they retire. In the past, those of a pensionable age had to buy an annuity, whose interest would then secure an income for the rest of their lives. Economic conditions coupled with people living longer (and maybe the attitude of the companies who provide annuities), has meant very low returns, which in comparison to the size of an individual’s pension plan seemed derisory. But all that changed last week. For those approaching retirement there is now an expanded range of investment opportunities. For those providing annuities, there is now much more competition, with some analysts calling it the end for the annuity industry. One thing is for sure – all those involved can no longer continue as in the past.
Change is like that. It’s typically unexpected and occurs at the most inconvenient times. For example, being March 2014, most organisations have set their budget for this year. And yet the government budget announced that the annual investment allowance is to be doubled from April 2014, allowing businesses to get immediate tax relief on investments in plant and equipment. To take advantage of the cash this releases will undoubtedly mean changing the current company budget. Some change often requires an immediate response. Knowing that a competitor is about to launch a new, better product at a fraction of the cost, can’t be ignored. Similarly, knowing that sales is behind plan or that costs are way over, needs a response. Telling everyone to cut costs or sell more isn’t usually going to work in the long-term.
Coping with change requires management to understand how their organisation generates value. This means modelling their business processes and ensuring adequate resources are allocated to departments so that they can carry out a known level of work. Doing this in a spreadsheet is a nightmare as it requires feedback from multiple departments and an ongoing dialogue on what is working. Most people are familiar with the limitations of a spreadsheet when used in this way. For a list of issues they cause read our article on spreadsheet hell. The best solution is to create a business model using a modern planning application such as Financial Driver. This allows multiple people to be involved and can be used to set budgets, collect forecasts, and report actual results. For more information on how this can be done see our article on continuous budgeting. Best of all, Financial Driver can then be used to cope with change. For example, it allows the current budget to be copied to a new version – e.g. scenario 1. Management can then make changes to the business model within this scenario in terms of adding new products/services that affect future sales; reducing costs by outsourcing certain functions; or taking advantage of the new tax relief rules and investing in new equipment that could reduce costs on the future. Viewing the impact of change in this way allows management to choose the best course of action from a range of options. Using Financial Driver means that organisations are able to cope with change. They can constantly review the impact of announcements, evaluate multiple scenarios in response; and then adjust budgets to incorporate the option that gives the best overall outcome. Unexpected changes such as those announced in the budget, can bring competitive advantage. But only to those organisations who can cope. With Financial Driver organisations will be in a better position from those that rely on spreadsheets.