3 Reasons Your Budget Is Already Outdated
This is the second part in our series on budgeting and beyond.
Let’s play part one of our budget series forward a few months. It’s a new year and we have just started comparing actuals to our brand-new budget. However, we are already finding the world hasn’t developed exactly the way we predicted when we were compiling our budget “back in October”. Perhaps we thought the oil price wouldn’t go up farther than $70 per barrel, or the USD/EUR wouldn’t go higher than 0.80 or the US economy would begin to wane. Oops. While things might still turn the way you saw them chances are your budget assumptions will never be accurate and will always be outdated once you begin the budget year. That is OK. We need to quit treating the budget as a static document. Here are the 3 reasons why the budget is important; as a target, as a forecast and for resource allocation.
- Many times the budget process is used to create a “target” for compensation purposes. It is often different than the forecast budget because it may be subject to negotiation between owners and managers.
- The forecast is our best prediction for what will happen. It’s future based on expectations, not facts. The forecast will change as variables that created the forecast change.
- The allocation of human and capital resources is the driving force behind a budget and a key link to the long-term corporate strategy. As business drivers continuously change our resources must be constantly realigned to meet the new business conditions.
The solution is simple. Go beyond budgeting. Start by splitting up your budget into a means for target setting, a rolling forecast and a resource allocation tool. With this you will achieve the following:
- A separate target setting process will enable us to link our strategic direction setting with our compensation plan. The targets, whether they are quarterly, annual or more long-term, will now be based on where the company expects to be strategically at the end of the target period and also leave room for negotiation without distorting the company’s view of the future.
- Whether we do it monthly or quarterly, updating our forecast will keep us abreast of the changing landscape our businesses face and give us the opportunity to adjust to those changes.
- Resource allocation will be based on corporate objectives and return criteria. This will ensure good projects get funded whereas bad projects, even if included in the budget, will not.
This framework gives us a lot more flexibility to manage our company and make the right decisions. Have your company take some steps. Go beyond the budget this budget season.
Read the next article in the series: Now You Wish You Were Beyond Your Budget
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