Budgets for All Seasons

IRD default settings cause most commercial businesses to opt for a March year-end. So for most of us, March and April are budget season, where the Annual Business Plan and Budget is scrutinised, polished, iterated and finally accepted by a Board whose members maintain an experienced scepticism about its attainment.
In the governance and management world of last century, the Annual Budget, blessed by executive and Board, formed an important part of a continuum of strategies, plans and performance measures cemented into place each April. A comprehensive planning programme looked like this: –


While this is still the generally practised planning and performance tracking framework, the traditional annual cycle is now too rigid and slow for most firms operating in volatile economies. This has given rise to new approaches to budgeting, all aimed at more effective forecasting and nimbler decision making. Scenario planning, zero-based budgeting, rolling forecasts and quarterly budgeting are all useful techniques.

The way budgets are developed and used should also be adapted to today’s unpredictable business landscape.

  • Key metrics should be reviewed so that the dashboard shows the crucial KPI’s. A shift to liquidity, asset productivity and asset quality from an emphasis on revenue and growth metrics is one example.
  • It is smart to shorten the budget process, so that the base assumptions have some chance of remaining relatively current.
  • It is also worthwhile for CFO’s to apply the materiality test, short-cutting the level of detail in budgeting, especially in revisions or in quarterly budgets, so that the focus is on those adverse trends and events that can hurt the company.
  • Budget-derived measures used in incentive schemes are fraught with problems as budgets change. While there are no easy answers, a redesign of personal KPI metrics may set up measures less susceptible to economic volatility – such as market share; new clients gained; improvement in survey satisfaction; products successfully launched; or gains in organization productivity.
  • Sales and product managers, QS and accountants must constantly review and update their standard cost rates, so that quotation and pricing decisions still recover forex, materials, labour and absorbed overhead.

However you plan and measure your company’s performance, may it exceed your expectations in the financial year ahead!