The pandemic has caused many managers to realise that fundamental changes must be made to their budgeting and financial planning methods. Management and finance departments must be flexible when responding to changes in the environment, otherwise the budget is useless.
Companies create budgets for a couple of important reasons:
1) To motivate their team/s to work towards achieving certain objectives and results
2) To obtain operational feedback for management decisions (e.g. to inform the implementation of cost-saving measures if revenues remain lower than expected)
In 2020, business managers realised that it is easier to predict expenditure than revenue in an extraordinary recession. Budgeting is not what it was before.
The economy may see a polarized recovery curve in which some sectors (e.g. technology, e-commerce) recover exceptionally well and others (e.g. tourism, entertainment) recover exceptionally poorly.
The traditional static budget does not inform reasonable management decisions or motivate employees to achieve their goals. A budget is only useful if it aligns with the objectives and activities of the company.
In an ideal budget, constant comparison with actual results is undertaken and the budget is adjusted according to the situation. This is called agile budgeting. In a rapidly changing health crisis that has led to significant changes in the economic environment and consumer behaviour, it is no longer sufficient to simply look at the budget twice a year on strategy days.
So, times have changed. The budget created in November will be too optimistic for many by March, when the scales of the pandemic will raise records worldwide.
It is not possible to know what the world will look like in a few months, who will be affected by the spread of COVID-19, and when we will return to long-lasting stability. No one can predict what restrictions and economic downturn we need to survive the imminent months.
So, what should be taken into account when creating and monitoring a budget in order to really benefit?
Different budgets and what-if scenarios
For companies whose activities are increasingly affected by global changes, it is sensible to create a number of different scenario-based budgets. These scenario-based budgets may include optimistic, conservative and crisis scenarios. Assuming that the budget is meaningful and appropriate to the crisis, it will allow for well thought-out decisions and savings on expenses that are not critical to the continuation of the company's activities.
Capturing the right moment to switch budgets
Switching to another budget and cutting costs requires the ability to identify a strategic moment. It is therefore worth thinking about specific indicators that will signal the initiation of your switching decision.
You also need to consider your timing – when it is possible to switch your company from one budget to another, quickly? At what speed can you cut spending when it comes to a conservative budget, or cancel contracts and carry out the necessary coordination? When will you reopen staff training budgets, create an additional marketing campaign or launch a new product?
Courage and ability to be agile
Unfortunately, scenario-based budgets are not always a successful answer. Certain sectors – including tourism and transport – which were heavily affected by pandemic restrictions, have had to abandon budgeting and strategic planning to look at their costs every week or even every day to ensure their survival.
Therefore it is important to have the flexibility and courage to make fundamental changes in financial plans quickly, to be agile.
Transition to ongoing forecasting
The failure of a customer agreement, or increased pandemic restrictions can make a normal static budget obsolete overnight. Ongoing forecasting has been acknowledged for years, but it is only now that this budget format is increasing in popularity.
The ongoing forecasting method does not cling to the financial year but moves further through a selected period (a so-called rolling forecast). In order to utilise ongoing forecasting correctly, the information and data used must be identical for all parties concerned and not fragmented into several Excel spreadsheets or reporting systems.
What about the sectors that are booming
Airlines and e-commerce platforms are currently in diametrically different situations. There are business sectors that have not been negatively affected by the pandemic and in which life has accelerated.
The companies operating in these fields have probably underestimated their financial results. Their actual results may be more positive. These companies may now begin to make poor management decisions based on their good circumstances, while salesmen may fall into a comfort zone as their sales goals have already been met.
What is the point of a budget in 2021+
Ultimately, it depends on what the budget is needed for on an individual basis and whether the information it provides truly affects someone's activities or decisions. If comparing the monthly budget with actuals in your company has become simply a “good to know” type of non-actionable activity , then it is time for you to review your budgeting and planning principles to adapt to the changed market circumstances.