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What Use Is the Budget Now?

  • By Bryan Lapidus, FP&A
  • Published: 3/30/2020

budget

The finance community sounded off in response to my recent LinkedIn post on how virtually everyone has thrown their budget out the window. Below are a few key points and points of view to share. The last one may be the most relevant!

[Comments are anonymous here as AFP has not obtained permission to reprint their quotes. Comments are lightly edited for clarity and brevity.]

DUMP THE BUDGET

Forecast will be run as usual, but the budget created last year and adopted to the system is out of the picture now.

  • It happens every year. You spend five months working up a budget, and then conditions change as you enter the new year. The budget goes out the window; and then you focus on forecasting. But in most years, companies can make it through Q1 before the straying from budget; this year is a little different, to say the least.
  • Aren't budgets pretty much obsolete after they are approved anyway? The way to go is to have a consistent rolling forecast process that can quickly be updated should things change. Which then could also feed into a replan as needed.
  • Most-to-all company execs will focus on their forecast instead of budget this year.

KEEP THE BUDGET

  • Timing is the big miss for many companies right now, not a loss of business. What's going on is ideally a short-term, not long-term, interruption. I wouldn't throw out the budget.
  • Budgets are based upon strategic planning considerations. Risk mitigation efforts do not mean that the overall corporate strategy needs to change drastically. It could for some companies in at-risk industries but probably not for most. The key word right now is 'disruption'—disruption does not necessarily spell disaster. 
  • I suggest companies should throw [out] traditional budgets where they focus on variance only and defining them as favorable or unfavorable variance without knowing any drivers. Rather, they should adopt more agile, flexible and most importantly integrated budgets where financial planning is fully integrated with operational and strategic plans. We did it using activity-based costing at a very advanced level, where our each and every activity is budgeted based on activity-based drivers and linked with the strategic objectives of the company [and reported on during monthly reviews]. During crisis and turbulent, integrated budgeting based on ABC is very useful as we know which activities are more value-adding and from where to reallocate resources.

TIME FOR DRIVER-BASED ROLLING FORECASTS

  • We are working on moving to a driver-based rolling forecast, which is honestly a much taller task than I thought it would be. We laid the foundation, putting in a new planning system last year that supports a rolling forecast with built-in functionality and a lot of nice bells and whistles. But the most painful part has been trying to drive the corporate culture change with business leaders (and some in FP&A) who are so resistant to change.
    • People generally underestimate the need for change management when switching processes and cut the budget in the areas of training, documentation, desk aids, etc., and this includes business leaders as well. By doing this, the system or process is never leveraged to its capacity and the business never receives the full benefits. I frequently recommend to clients that they implement fewer modules or features at first. But for the ones that they decide to go forward with, do them really well. This ends up creating the ROI that they are looking for, which can then justify future changes.
  • Consider how challenges to your planning inputs will reflect in your FP&A outputs and lead to many forecast iterations. Normally, planning teams take the accounting "actuals" as facts and build from there. But those facts are not settled for many reasons—accounting is getting data in late from their sources; accounting is struggling with their own process disruptions; I/S and B/S assumptions need to be tested/changed for many line items (e.g. tax carry-forwards, write-offs, collections, IBNR); changing legal provisions; delayed SEC reporting is pushing reporting timelines back, etc. Takeaways: expect iterations, clarify expectations about the forecast and communicate with accounting and budget owners.
  • I had a conversation about a company that, in the last financial crisis, threw out their budgets and went to rolling forecasts. Comparing variance to budget was meaningless. And they never went back.

APPLY PROBABLISTIC MODELING

  • Have you tried out probabilistic forecasting using Monte Carlo techniques to address the planning and financial forecasting enigma we are currently dealing with? For example, you can run the best, worst and most-likely scenarios on a daily basis with updates of new information and provide probability percentages to guide decision-making. If you are not familiar with it and/or do not have the software, it may be hard to implement in this environment.
  • The big issue with Monte Carlo is executive acceptance. Scenario analysis can be helpful, but people sometimes tweak and weight results to their liking (in my experience).
  • Stochastic modeling of key assumptions by the stats professionals at a greater confidence interval and then running through Monte Carlo is a strong idea. The average of these key assumptions can then be incorporated into your deterministic forecast model. It's really all about possessing driver-based forecast modeling and we can all do this on our desktops if we learn and keep an open mind. If there are no statistics professionals around your office, try software such as Palisades @Risk. Or scenario test in a disciplined manner.

APPRECIATE THE EFFORT

  • Huge kudos to all finance and accounting professionals out there right now. Working around the clock under very stressful situations.

For more insights in this difficult time, visit AFP’s Coronavirus Resource Center.

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