Budgeting is typically seen as an annual exercise lasting 3 to 4 months that is typically out of date within the first quarter. This isn’t surprising given the pace of change within today’s business environment. In fact the concept of annual budgeting, quarterly forecasting and monthly reporting were all established in the 1920’s, when the world was a very different place.
What is required is a budget process that is in tune with strategy. I.e. anytime key measures within the plan deviates by an agreed amount, there should be an automatic trigger to review and if necessary re-plan the affected parts. These key measures could include summary costs and revenues by major product/geographic area; key assumptions on the business environment; unexpected competitor/customer/market changes that have the ability to significantly change the future.
This means collecting forecast figures and key performance indicators, as well as the actual resources used. This data then needs to be analyzed and assessments made as to whether the ‘business as usual model’ is accurate; whether strategic initiatives are being implemented; and whether the costs involved are worth the results being produced.
The budget/reporting process itself should be ‘continuous’. It may start out by first collecting ‘business as usual’ budgets and assessing whether the results forecast by the driver-based model are realistic based on past performance. When we say that this activity is ‘first’, it also should be a continuous activity that happens throughout the year, with the ‘budget’ for future periods being continually revised and updated.
Once the ‘business as usual’ figures are established, then the impact of strategy can be overlaid through the budgeting of strategic initiatives. These initiatives can be considered to be projects that have a defined life cycle and associated resources. There is no reason why this set of initiatives could also be assessed, cancelled or redeveloped on a continuous basis. The funding of these will come from a separate budget that can be increased or cut as conditions dictate. But it needs to work in conjunction with the ‘business as usual’ budget to give the full resource picture.
As mentioned earlier, as well as regular reporting on the accuracy and impact of the two budgets, there also needs to be mechanism that will trigger reviews or re-plans based on exceptions, events as well as a date on the calendar.