A lot of the skepticism towards a sophisticated and time-consuming budgeting process relates to the fact that modern businesses must operate in extremely uncertain times where the circumstances and assumptions that you make today are very likely to change tomorrow, and the day after that, and the day after that. The speed of change is dramatic and in this uncertainty, it’s natural to wonder whether the entire budgeting process is a moot point.
Of course, even if our budgets do reflect an outdated view of what the business landscape is at any particular moment, there are still a lot of benefits that come with a robust and thoughtful budgeting process at the beginning of a financial cycle. We must not only contend with the uncertainty that lies in front of us, but we must plan for it – remaining as agile and open-minded as we can, without giving up the core constraints which are the very purpose of setting budgets in the first place.
In this vein, we came across a fantastic treatment of this topic from the Boston Consulting Group (you can find the full article here) and we thought we’d explore some of the ideas that authors Sebastian Stange and Alexander Ross bring up as we strive to budget effectively in the midst of high levels of uncertainty.
Focus on relative targets
A remarkably simple, but powerful, idea is for budgeting in uncertain times is to try and steer away from absolute budgets and instead focus on relative numbers. For example, thinking in terms of profit margins, market share, return on capital, and other such metrics helps to give the budget the flexibility it needs to adapt as other circumstances do. Of course, there are always going to be some aspects that you need to tie to absolute numbers, but the more you can leave as a variable driven by some other assumption, the more agility you have.
This is really where IBM Planning Analytics / TM1 comes into its own because the entire dynamic database model is built to enable these sorts of interactions in the planning process. When you focus on relative targets and tie performance measurement benchmarks to those, you’re more likely to have a flexible plan that fairly evaluates how things have gone without being held to numbers that are now out of date.
Budget for shorter timeframes
Most companies will do a budgeting process once a year and then are shackled to those numbers until the next year-end when they have a chance to revisit the numbers. Things don’t have to be like this and if you can invest the time and resources into budgeting in smaller timeframes as well (quarterly, monthly, etc.) you give yourself the opportunity to adapt to what’s happening and be more responsive to the feedback you’re receiving from the marketplace.
This does take extra effort of course, and often it can feel like it’s getting in the way of core operations but, in truth, the extra time spent getting the planning right here compounds and gives you a much tighter grip on operations – allowing you to maximize any opportunities that come your way.
Utilise scenario planning
The last pillar of budgeting under uncertainty is to make full use of scenario planning to evaluate how different scenarios are likely to affect you. Using a tool like IBM Planning Analytics / TM1 makes this very easy to do because you can build out a variety of scenarios that respond dynamically to changes in assumptions, parameters, and drivers. Making this a critical part of your budgeting process ensures that you are prepared for anything that comes your way and you can switch strategies as needed if one of your scenarios comes to pass.
This is especially important when it comes to costs and cash flow because those are the aspects that are often the worst hit when things go sour. If you have Plan B and Plan C ready for those eventualities then you’re putting yourself in a position to not only survive the uncertainty but come out on the other side stronger than you were before.
Those are just a few of the insights that we pulled from the Boston Consulting Group report and we believe that they’re well worth thinking about as we move into 2023. Here at Apliqo, we’re well-positioned to help you with this budgeting process, so if you want to take things to the next level, get in touch and let’s see how we can assist!