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- Running with a budget that is out of date, and that doesn’t allow an organisation to respond to change simply doesn’t make sense.
- 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.