Smarter budgeting and forecasting

• Budgeting and forecasting shaped by a world of disruption and uncertainty requires new thinking because traditional methods will no longer cut it

We now live in a BANI (brittle, anxious, nonlinear and incomprehensible) world, according to Jamais Cascio, a futurist. A BANI world means a shift in understanding our new realities. Budgeting and forecasting in a world of disruption and uncertainty requires new thinking that enables finance professionals to effectively empower organisations and drive success.

Traditional methods are outdated 

In some cases, however, accounting and finance professionals continue to use “traditional budgeting”, which means planning for the long term — typically for a year or more, though businesses have also established three-year fixed budgets in the past. Is the historically fixed traditional budgeting and forecasting model the most effective method for success? 

Often a traditional one-year budget is agreed, with adjustments made gradually to reflect changes like increased costs. However, the traditional accounting budget model was developed at a time of stable market conditions. In today’s market, with so much daily change, making a one-year plan can be cumbersome and may no longer be fit for purpose. Put simply, a traditional one-year fixed plan can’t keep up with technological advances, increased competition or fast-moving product changes.  

A strategy to meet demands: Dynamic budgeting and forecasting

Budgeting and forecasting allows a business to plan for its fiscal year as part of the strategic planning process. Planning is an attempt to shape the organisation’s future, whilst forecasting and budgeting aim to predict the revenue generated and resources allocated within a specific period. 

For example, a multiyear fixed budget was sufficient until technology gathered momentum and we were thrust into unanticipated events, including the global pandemic. Legislative changes to taxation like we’ve experienced in the recent past in Sri Lanka, require finance professionals and business leaders to review their operating models and potentially update pricing models and reporting requirements. 

There are a variety of smarter forms of budgeting and forecasting methods that can help organisations remodel and refine their traditional budgets to become more agile:

Activity-based — Activity-based budgeting is a method by which activities are analysed in detail to predict costs. There are three main steps in activity-based budgeting: identifying cost drivers, projecting total units and estimating the cost per unit.

Value proposition — Value proposition budgeting, also called “priority-based budgeting”, is about analysing and justifying the value of each item on an expenditure list. The goal is to identify where a business should spend money when seeking a return on investment. 

Zero-based — Zero-based budgeting starts from the standpoint that all organisational budgets are zero and need to be planned from scratch every year. The budget requires justifying and approving all expenses for every accounting period rather than basing allocation of monies on past spending. Having recently been involved in an exercise of promoting this to the Public Sector via the Ministry of Finance, I can certainly state this is no easy task – even for a Private organization. 

AICPA & CIMA provide resources to members, including webcasts about how to Move from Annual Budgeting to Rolling Forecasts and Budgeting and Forecasting: The Shift from Traditional to Dynamic.

Dynamic budgeting and forecasting require extra skills

Digital skills: Digital transformation is a critical component of the finance function and finance professionals need to keep up with the latest technologies to stay relevant. For example, new, flexible technologies are streamlining the planning process and artificial intelligence and machine learning are playing a crucial role in budgeting and forecasting models. 

Communication skills: Hybrid and remote working has been a game changer in the workplace. Colleagues who are no longer in the office all the time require new skills for effective collaboration. Finance professionals need to be able to communicate effectively, tell their budgeting and forecasting story and influence stakeholders remotely by using new technologies. 

Keep it simple, keep it agile: An uncertain working environment means that finance professionals must prioritise the ability to adapt quickly to a changing environment, to reflect fluid circumstances in their budgeting and forecasting assessments. The profession has traditionally focused heavily on time-consuming detail. Less detail and more simplicity is key to success. 

A budget is a roadmap for your organisation. If you don’t get it set up right from the start, you’ll be driving blind into territory which could be familiar yet strange, with roadblocks along the way. You hope that you’re going the right way, but you don’t have checkpoints to be sure. 

In an example closer to home, given the impact of last year’s financial crisis and the pandemic the year before, some businesses did reduce their budget allocations for sales and marketing. However, the more astute organisations invested more into these efforts to turn the crisis into opportunities, and as can be seen in the financial results – they have reaped the benefits. A Gartner CFO Survey shows that the sales function is most likely to see budget increases in 2023 as CFOs target functions that drive top-line growth. 

Setting a budget right and taking into consideration all the smarter ways of budgeting and forecasting will certainly help your organisation to thrive in these challenging times. And with the National Budget coming up soon – next week – we hope these have been taken into account! 

(The writer is a FCMA (UK), CGMA, MBA, PMP and Country Manager — Sri Lanka & Maldives at AICPA & CIMA, together as the Association of International Certified Professional Accountants.)