New Year New Budget
- matthew0268
- 3 days ago
- 16 min read
I was listening to a podcast today with ex professional cyclist George Hincapie who after retiring has now a number of business interests. He was asked if he still sets goals to which he answered not really. This worries me as every business should have at the very least a set of financial goals or a budget in order to effectively enable a businesses to allocate resources efficiently, control costs, and make informed decisions.
Once set, some companies take a very static approach to reviewing the budget for the year with actuals reported on each day, week, month or quarter with no amendment. However, with companies at all stages a great deal can happen in 12 months and I think modern day leaders need to be reacting and adjusting to challenges and opportunities.
Two concepts I like as part of budget management is firstly to always have an annual outturn that is effectively adding a forecast for the year to the actuals YTD based on the information you have at the time. It is important that this doesn’t just add the rest of the years budget to actuals as if the sales or marketing leads are lower than assumed, or if there is a revenue shortfall due to pipeline conversion not occurring as assumed, or there is a cash shortfall due to debtor assumptions or additional capital investment, knowing this at least 6 months ahead of time allows you to make course corrections and decisions by having an outturn.
This leads into the second concept of dynamic budgeting, also known as rolling forecasting or continuous budgeting, rather than the traditional annual budgeting process.
Instead of creating a fixed budget for the entire year, dynamic budgeting involves regularly updating forecasts based on real-time data, market trends, and changes in business conditions. This approach enables businesses to be more responsive and agile, allowing leaders to make informed decisions in a rapidly changing environment.
It can also allow you to scenario plan and develop multiple options to debate before making decisions. I do think by doing this you can make decisions quicker rather than either delaying further investment for growth to the budget planning cycle or sleep walking into a loss making and cash out position.
However, I think there are issues with a pure dynamic budget approach as it effectively allows goal posts to move and can mask issues such as imperfect management information data, poor forecasting, sales execution, cost of sales or overhead management etc.
To overcome this, one key way to improve forecasting accuracy is to develop a stagger chart, which was developed by Intel’s Andy Grove. The chart tracks actual revenue growth for the business as well as how the forecasts for a particular month have changed with time. When forecasts fall out of line, it’s a red flag for the team to investigate the cause, or causes, for the deviation. Bridge diagrams are also very useful to understand why things are above or below where initially budgeted.
An alternative to full dynamic budgeting is advocated by well known venture capitalist and entrepreneur Brad Feld is a “first half, second half” approach to budgeting if conditions warrant a midyear reset. As Feld points out in his blog, FeldThoughts, “this is just a practical, commonsense move, because if you are not tracking close to budget, then the original budget serves little purpose in the day-to-day operations of the company. If this is the case, trash the existing budget and come up with a new one for the second half of the year.”
I do think like Grove’s technique keeping an eye on under/over performance is important as the more consistent you can be with budgeting the more confidence it breeds for all stakeholders.
So whether you have just set your budget for 2024 or are currently planning for April month 1 having an effective budget management is a cornerstone of financial success for businesses of all sizes.
Once set, by consciously thinking about these techniques for managing your budgets throughout the year, businesses can gain better control over their finances, optimize resource allocation, and drive sustainable growth.
I look forward to hearing your thoughts on how you approach your budgets.
Key Elements of Dynamic Budgeting:
Real-Time Data Integration: Dynamic budgeting relies on real-time data feeds from various sources within and outside the organization. This includes sales figures, market trends, and operational metrics. By incorporating up-to-the-minute information, leaders can make timely adjustments to their financial plans.
Flexible Planning Cycles: Unlike the rigid annual budgeting cycle, dynamic budgeting allows for shorter planning cycles, often on a monthly or quarterly basis. This flexibility enables businesses to adapt swiftly to changing market conditions, emerging opportunities, or unforeseen challenges.
Scenario Analysis: Dynamic budgeting encourages scenario analysis, where leaders can model different business scenarios to understand the potential impact of various decisions. This proactive approach helps in risk management and ensures that the business is prepared for multiple eventualities.
Collaborative Decision-Making: Collaboration is a cornerstone of dynamic budgeting. Cross-functional teams work together to provide insights and input into the budgeting process. This collaborative approach fosters a sense of shared responsibility and ensures that decisions are well-informed and aligned with overall business objectives.
Benefits of Dynamic Budgeting for Modern Business Leaders:
Improved Decision-Making: By leveraging real-time data and scenario analysis, leaders can make informed decisions that are responsive to market changes. This agility is particularly crucial in industries where conditions can shift rapidly.
Enhanced Resource Allocation: Dynamic budgeting allows for more precise allocation of resources. Leaders can allocate budgets based on the most current information and adjust allocations as needed, ensuring that resources are directed to the areas that will yield the highest returns.
Increased Forecast Accuracy: Regular updates to forecasts based on the latest data contribute to greater accuracy. This enables leaders to identify trends and make strategic adjustments before issues escalate, leading to more reliable financial planning.
Adaptability to Market Dynamics: In a globalized and highly competitive business environment, the ability to adapt quickly is a distinct advantage. Dynamic budgeting provides the flexibility needed to respond promptly to market dynamics, technological advancements, and changes in consumer behavior.
For businesses, managing a budget is not just about balancing income and expenses; it's a strategic tool for financial planning and achieving long-term success. A well-managed budget. In this blog, we'll explore various techniques that businesses can employ to effectively manage their budgets and drive financial growth.
Set Clear Financial Goals: Begin by defining clear financial goals that align with your business objectives. Whether it's increasing revenue, reducing expenses, or expanding operations, having specific goals provides direction for budget planning and resource allocation.
Create a Detailed Budget: Develop a comprehensive budget that encompasses all aspects of your business operations, including revenue projections, operating expenses, capital expenditures, and contingency funds. Break down your budget into specific categories and allocate funds accordingly.
Regularly Monitor and Review Expenses: Implement a system for tracking and monitoring expenses on a regular basis. This could involve using accounting software or establishing a dedicated finance team to oversee financial transactions. Regular reviews allow you to identify potential areas of overspending or inefficiency and take corrective action promptly.
Prioritize Spending: Prioritize spending based on your business priorities and strategic objectives. Allocate resources to critical areas such as marketing, product development, and customer service while identifying non-essential expenses that can be reduced or eliminated.
Forecast Cash Flow: Conduct regular cash flow forecasting to anticipate future income and expenses. This enables you to proactively manage cash flow fluctuations, plan for seasonal variations, and ensure that you have adequate funds to cover operational needs and financial obligations.
Implement Cost-Reduction Strategies: Explore cost-reduction strategies to optimize expenses without compromising quality or productivity. This could involve negotiating better terms with suppliers, implementing energy-saving measures, outsourcing non-core activities, or consolidating redundant processes.
Utilize Budget Variance Analysis: Conduct variance analysis to compare actual financial performance against budgeted targets. Identify variances and analyze the underlying causes to determine whether they result from external factors or internal inefficiencies. Use this insight to make adjustments to future budgets and operational strategies.
Invest in Technology: Leverage technology solutions such as budgeting software, expense management tools, and financial analytics platforms to streamline budgeting processes and gain real-time visibility into financial performance. Automation reduces manual errors, improves accuracy, and facilitates data-driven decision-making.
Empower Employees: Involve employees in the budgeting process and empower them to contribute ideas for cost savings and efficiency improvements within their respective areas of responsibility. Encourage a culture of fiscal responsibility and accountability throughout the organization.
Regularly Review and Adjust: Business conditions and market dynamics are constantly evolving, so it's essential to regularly review and adjust your budget in response to changing circumstances. Conduct quarterly or semi-annual budget reviews to assess performance, recalibrate targets, and make strategic adjustments as needed.
Conclusion: Effective budget management is a cornerstone of financial success for businesses of all sizes. By implementing these techniques, businesses can gain better control over their finances, optimize resource allocation, and drive sustainable growth. Remember, budgeting is not a one-time task but an ongoing process that requires diligence, adaptability, and strategic planning. With a well-managed budget, businesses can navigate challenges, capitalize on opportunities, and achieve their long-term financial objectives.
Managing the budget
Budget Management has evolved and there are a couple of
Motivate your teams to perform and achieve at their highest levels • Invest resources in the highest-priority projects • Protect the company if things go wrong or unforeseen challenges arise
Static,
However, on the flip side I do think for a loss making growth company having a contingency line in the budget for when not if things don’t go exactly to plan allows cash runway to be managed.
The budget, once approved, never changes, but the reality is that the world does change – move to DYNAMIC
Dynamic
Conclusion
My personal preference is Realistically ambitious for revenue, zero based budget for cost management, a cautious/pessimistic approach for cash forecasting and develop dynamic budgeting throughout the year or at the very least an H1/H2 in an early stage business.
Whilst many CEO’s do not have a financial background it is vitally important you develop enough knowledge to be able to make the right decisions in leading your business. My mentor taught me always to focus first on the balance sheet when reviewing management account. Watch out for accruals on the balance sheet and fully understand what they are. Whilst again it is right to accrue any known expense that is delayed by not understanding the accrual fully you may delay a decision that could slow down growth of your business.
Embracing this agile and adaptive methodology allows organizations to thrive in an environment of uncertainty and change. By leveraging real-time data, fostering collaboration, and embracing flexibility, dynamic budgeting empowers leaders to make strategic decisions that position their businesses for sustained success in the dynamic landscape of the 21st century.
-----------------------------------------------------------------------------------------------------------------------
As many companies watch growth in sales, general, and administrative (SG&A) costs outstrip increases in revenue, controlling expenses has become an even greater priority. As a result, executives are under ever-increasing pressure to deliver productivity improvements, and almost all companies have sought to reduce costs, whether through traditional programs such as outsourcing, offshoring, and strategic sourcing or other one-off cost-reduction events. But in many cases, these are still not enough. Executives need bigger savings that can be sustained over time.
Unfortunately, the typical approach to identifying cost-reduction opportunities—examining operating expenses in the aggregate—is poorly suited to driving realizable, lasting, and significant benefits. The findings are often too high level to link clearly to the actions required to unlock the savings. Moreover, managers can avoid action by refuting the underlying data or citing unique business needs. Given such constraints, when savings are required, executives often feel they have no choice but to slash and burn, making arbitrary budget cuts without any changes to the underlying work, regardless of how prudent or sustainable those choices may be.
Fortunately, there is a sustainable alternative to cost management appropriate for many companies: zero-based budgeting (ZBB). We have heard of many versions of ZBB, including the literal interpretation of the words: “a technique for building a budget from zero.” While that is certainly a fundamental part of ZBB, our experience has shown that effective ZBB is much more than that.
Five myths, five realities
Zero-based budgeting is a repeatable process that organizations use to rigorously review every dollar in the annual budget, manage financial performance on a monthly basis, and build a culture of cost management among all employees. A world-class ZBB process is based on developing deep visibility into cost drivers and using that visibility to set aggressive yet credible budget targets. The annual budgeting process does in fact start from zero and is very detailed, structured, and interactive in order to facilitate meaningful financial debate among managers and executives. Throughout the year, multiple owners are tasked with managing performance and continuing the healthy debate on cost management. Through new system and process controls, and aligned incentive programs, all employees make cost management a part of their daily routine.
One company recently realized 11 percent savings in its operating budget within the first four months of a new ZBB program. In this instance, immediate savings came from increasing visibility into labor costs and executing new approval thresholds to control demand for contract labor, relaunching procurement initiatives to renegotiate prices, and changing “make versus buy” decisions. More than 40 percent of the savings were strategically reinvested in new teams and sales staff who spent all their time with customers. While this company chose to reinvest those savings in the customer-facing parts of the business, other companies use the savings to fund and therefore amplify the next wave of productivity. And, of course, some let the savings fall to the bottom line.
When properly implemented, ZBB can reduce SG&A costs by 10 to 25 percent, often within as little as six months. Just how ZBB is capable of delivering and sustaining these results remains a bit of a mystery for many executives. The opaqueness of the term and the dire tone of the media stories can be intimidating, sometimes causing ZBB to be avoided as an option for improving productivity. What follows is an attempt to explore some common myths, debunking them and highlighting how a well-run ZBB program can drive sustainable impact in leading organizations.
Myth one: ZBB simply means building your budget from zero
Reality: ZBB is a repeatable process to build a sustainable culture of cost management
Zero-based budgeting is much more than building a budget from zero. World-class ZBB efforts successfully build cultures of cost management throughout the organization by using a structured approach to facilitate cost visibility, cost governance, cost accountability, and aligned incentives. Fortunately the culture shift isn’t left to chance. We believe that there is a proven, step-by-step approach to implementing successful ZBB programs, and when this implementation is done well, ZBB makes cost management a part of the way every employee works on a daily basis.
Myth two: Implementing ZBB requires cutting ‘to the bone’
Reality: The degree of cost reduction is based on the company’s top-down target
Although very little has been written recently about zero-based budgeting, the published content that exists often associates it with cutting costs to the bone, using any means necessary (for example, eliminating mini refrigerators in office kitchens to save electricity). While this may sometimes occur, it is by no means necessary. Simply put, the degree (and aggressiveness) of each company’s cost cutting reflects the size of its top-down savings target. For instance, in the most aggressive situations, we’ve seen 30 percent reduction targets in year one versus other situations that aim for 10 percent reduction targets with an agreement to reinvest half of that into more productive areas, therefore only taking 5 percent to the bottom line.
Myth three: ZBB will overwhelm your business and prevent it from doing anything else
Reality: Initial rollout of a new ZBB program can be led by a central team and completed in four to ten months
Recently, one executive we met with said, “I simply cannot afford to ask the entire company to stop what they’re doing for the year to implement ZBB.” The idea that ZBB requires dedicated focus from every employee for a year or more is simply not true. While it takes time to embed a new cost-management culture into any organization, the setup and rollout of a new ZBB program has much more limited requirements.
During the initial setup, a central coordination team develops deep visibility into costs and sets detailed savings targets for the next budgeting cycle. That team also ensures that the company’s systems and processes are in place for the detailed reporting, governance, and performance management that a world-class ZBB requires. In our experience, this setup period could take anywhere from four to ten months and is primarily led by full-time support from finance and IT, with part-time involvement from profit-and-loss owners and cost-category owners across the company.
Organizations that are unsure about ZBB’s upside are well suited to pilot the process. There are many ways to build these pilots, each of which can be customized to meet the company’s objectives. One company, for instance, is piloting a ZBB rollout across its global finance function. This approach builds capabilities within the team that will help drive the program across the enterprise while having the added benefit of helping team members achieve their existing budget targets.
Myth four: ZBB only focuses on SG&A
Reality: ZBB can be applied to any type of cost: capital expenditures; operating expenses; sales, general, and administrative costs; marketing costs; variable distribution; or cost of goods sold
The fundamental elements of a ZBB program—governance, accountability, visibility, aligned incentives, and a rigorous process—form a comprehensive cost-management tool kit. However, certain adjustments need to be made when using this tool kit in particular areas. For example, when ZBB is applied to variable costs (such as cost of goods sold, variable distribution) the budget needs to be volume adjusted in monthly performance reports. When ZBB is applied to capital expenditures, costs are categorized by discrete investment choices rather than types of expenses, as they are with operating expenses.
Myth five: ZBB is not designed for growth-oriented companies
Reality: ZBB is successfully used by growing companies to redirect unproductive costs to more productive areas that drive growth
Zero-based budgeting is a powerful tool for any company, whatever its orientation. Even if the organization’s primary focus is on growth, profit, or talent retention, cost management remains crucial to its success. Eliminating unproductive costs allows the company to be redirected to more productive areas. As we mentioned in the earlier example, back-office costs can be redirected to customer-facing activities.
ZBB is not a slash-and-burn exercise that cuts costs without regard for the expense. With deep visibility into costs, changes can be made to surgically cut the fat and help build up organizational muscle.
Zero-based budgeting can drive significant and sustainable savings, but it is much more than simply building a budget from zero. World-class ZBB programs build a culture of cost management through unprecedented cost visibility, a unique governance model, accountability at all levels of the organization, aligned incentives, and a rigorous and routine process. ZBB frees up unproductive costs and allows those savings to be taken to the bottom line or redirected to more productive areas that will drive future growth.
In recent years zero-based budgeting appeared to experience a renaissance, as cash-strapped businesses had to justify every penny of their spending.
While the UK economy continues to be volatile, it’s vital that smaller businesses cut unnecessary expenditure while trying to grow at pace.
Sustained use of zero-based budgets could help to enforce a culture of cost management.
Isn’t it time you examined whether it can benefit your business?
What is zero-based budgeting?+
Zero-based budgeting means budgeting by justifying and approving all expenses for each accounting period, rather than basing it on your past spending.
By starting from a ‘zero base’ at the beginning of each budget, you can create a really effective process for analysing and deciding where to allocate your funds.
It is essentially a way of improving return on investment (ROI) across your business.
Who developed it?+
Peter A. Pyhrr developed the idea of zero-based budgeting in 1969 while he was an account manager at Texas Instruments in the US. In 1977, he wrote his seminal book on the subject, ‘Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses’.
Jimmy Carter, then Governor of Georgia, was the first to adopt the process of zero-based budgeting within government when preparing the fiscal 1973 budget.
Advantages of zero-based budgeting+
Here are some common advantages of zero-based budgeting.
Helps a business assess whether each of its departments is appropriately funded
Allows management to focus on current numbers rather than the figures within previous budgets
Can remove needless spending
Can enable better communication within departments by involving employees in decision-making and budget priorities
Disadvantages of zero-based budgeting+
Unfortunately, zero-based budgeting doesn’t guarantee you’ll make savings, as the trick is in how you execute it.
Moreover, the process can be complex and there may be opposition from managers who fear their budgets are under threat and who don’t relish having to justify their spending.
That’s why clear communication, and making sure you involve staff at all levels of the business, can help the process to work more effectively.
Additional information+
A detailed report from worldwide professional services experts Deloitte on zero-based budgeting, including what it means, how it typically works, and some of the challenges of using it.
An interesting and in-depth article on zero-based budgeting from business consultants McKinsey & Company.
Introduction:
In today's fast-paced and ever-evolving business landscape, adaptability is key to success. Traditional budgeting methods, with their static and inflexible nature, are becoming increasingly obsolete. Modern business leaders are turning to dynamic budgeting as a strategic tool to navigate the uncertainties and challenges of the contemporary marketplace. This blog explores how dynamic budgeting is reshaping the way businesses are managed and highlighting its benefits for forward-thinking leaders.
Understanding Dynamic Budgeting:
Dynamic budgeting, also known as rolling forecasting or continuous budgeting, is a departure from the traditional annual budgeting process. Instead of creating a fixed budget for the entire year, dynamic budgeting involves regularly updating forecasts based on real-time data, market trends, and changes in business conditions. This approach enables businesses to be more responsive and agile, allowing leaders to make informed decisions in a rapidly changing environment.
Key Elements of Dynamic Budgeting:
Real-Time Data Integration: Dynamic budgeting relies on real-time data feeds from various sources within and outside the organization. This includes sales figures, market trends, and operational metrics. By incorporating up-to-the-minute information, leaders can make timely adjustments to their financial plans.
Flexible Planning Cycles: Unlike the rigid annual budgeting cycle, dynamic budgeting allows for shorter planning cycles, often on a monthly or quarterly basis. This flexibility enables businesses to adapt swiftly to changing market conditions, emerging opportunities, or unforeseen challenges.
Scenario Analysis: Dynamic budgeting encourages scenario analysis, where leaders can model different business scenarios to understand the potential impact of various decisions. This proactive approach helps in risk management and ensures that the business is prepared for multiple eventualities.
Collaborative Decision-Making: Collaboration is a cornerstone of dynamic budgeting. Cross-functional teams work together to provide insights and input into the budgeting process. This collaborative approach fosters a sense of shared responsibility and ensures that decisions are well-informed and aligned with overall business objectives.
Benefits of Dynamic Budgeting for Modern Business Leaders:
Improved Decision-Making: By leveraging real-time data and scenario analysis, leaders can make informed decisions that are responsive to market changes. This agility is particularly crucial in industries where conditions can shift rapidly.
Enhanced Resource Allocation: Dynamic budgeting allows for more precise allocation of resources. Leaders can allocate budgets based on the most current information and adjust allocations as needed, ensuring that resources are directed to the areas that will yield the highest returns.
Increased Forecast Accuracy: Regular updates to forecasts based on the latest data contribute to greater accuracy. This enables leaders to identify trends and make strategic adjustments before issues escalate, leading to more reliable financial planning.
Adaptability to Market Dynamics: In a globalized and highly competitive business environment, the ability to adapt quickly is a distinct advantage. Dynamic budgeting provides the flexibility needed to respond promptly to market dynamics, technological advancements, and changes in consumer behavior.
Conclusion:
Dynamic budgeting represents a paradigm shift in the way modern business leaders approach financial planning. Embracing this agile and adaptive methodology allows organizations to thrive in an environment of uncertainty and change. By leveraging real-time data, fostering collaboration, and embracing flexibility, dynamic budgeting empowers leaders to make strategic decisions that position their businesses for sustained success in the dynamic landscape of the 21st century.
Comments