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No Nonsense Budgeting: 9. Make the process dynamic

This is the tenth in a series of blogs on improving the corporate budgeting process. In the last blog I looked at developing scenarios as a way of overcoming budget ‘heroes’ and ‘villains’. In this blog we will look at making the budget process more dynamic.
Have you ever wondered why organisations set an annual budget? It may fit nicely into the way an organisation reports performance, but it has some major pitfalls:
  • It requires managers to guess performance 15 months out when in reality, forecasting the next 6 months is a real challenge.
  • Competitor actions and changes in customer attitudes are rarely aligned with the frequency and timescales of the budget process
  • Running with a budget that is out of date, and that doesn’t allow an organisation to respond to change simply doesn’t make sense.
The trouble is that most organisations spend around 4 months generating a budget and so doing this several times a year is not an option. What it requires is a rethink on what is budgeted and how the process is conducted. To break away from an annual process to one that can react to changing events, requires budgets to be split into two parts: ‘Business as Usual’ and ‘Strategic initiatives’, which we covered in the blog 'Linking budgets to strategy'. With ‘business as usual’, budgeting becomes more of a rolling forecast process. In other words, the resources (both overheads and variable) required to run a department can be set on a continuous basis, based on departmental activity and outputs required. These can be set many months in advance and could be automatically generated through drivers. Departmental and senior managers would review these from time to time to assess whether the resources assigned are sufficient for the workload, or whether they need to be rethought in the light of a change in the market, e.g. a competitor introducing a more efficient/less costly product, a change in government legislation that requires more disclosure, etc. Strategic Initiatives on the other hand can be planned at any time. This again could be in response to competitor actions; an unplanned change to the business environment; or simply the need to improve the performance of a particular department. By doing this, budgeting can become a continuous process that is able to respond to unpredictable events. It is still able to provide an ‘annual view’ simply by looking at the next 12 months, but it eradicates much of the game playing and time lost through guessing numbers that no one really believes.
  •  Split budgets into ‘business as usual’ and strategic initiatives (see blog 5 – Linking budgets to strategy)
  • Set thresholds for each major budget item, i.e. how far will a variance be allowed before action is taken to re-budget.
In the next blog I will look at exploiting the power of technology. If you can’t wait then request our free booklet ‘No-Nonsense Guide to Corporate Budgeting’ that’s guaranteed to help you get control and make best use of scarce company resources.