The task of preparing an operating budget requires greater attention in uncertain times, writes Adrian McKelvie.

Uncertain times highlight the inherent weaknesses in the standard operating budget process. It is important we are aware of these weaknesses and have processes in place to counteract them.  

Senior management and the board need to be aligned on key budget assumptions.

Adrian McKelvie

Once approved, all levels of the organisation need to be aware of any content that may prove relevant in performing their duties.

The following has a key role in ensuring an effective outcome from the budget process in the current climate.

Firstly, determine what result is needed to allow the organisation to achieve its goals or strategic plan.

The budget package needs to contain:

  • profit and loss statement
  • balance sheet
  • Cashflow
  • key metrics from the best case and worst case scenarios
  • table of key assumptions
  • sensitivity of the result around each key assumption
  • capital plans included in cashflow
  • other initiatives included.

Determining the key assumptions will need to be a more robust process giving special consideration to what is happening in the broader economy. The impacts may not be initially obvious.

Determining a best, worst and base case is needed to enable stress testing. The base case does not necessarily sit mid-way between the best and the worst cases.

Clear, communicated assumptions allow for a better understanding of the actual result. They make it possible to determine if the variance is a result of unexpected operational performance or an assumption that proved to be incorrect.

I suggest a budgeting model which:

  • allows for modelling at least three scenarios
  • is built on best practice guidelines
  • has assumptions clearly separated so that stress testing can be carried out
  • has been heavily tested

Both improvement and risk management initiatives need to be considered for inclusion in the budget.

Reasons I recommend this include:

  • the correct setup is time-consuming and requires significant skill
  • it is a one-off investment as the model can be used for many years to come
  • in uncertain times, organisations must be prepared for a range of potential scenarios – a singular view of the future does not provide the relevant information
  • in uncertain times, forewarning may prove to be an indispensable tool when navigating the intricacies of rapidly evolving arrangements.

A robust budget process is not enough

If you have an annual budget process, the forward projections very quickly become outdated which reduces the time available to rectify predictable adverse outcomes.

It is far more productive to attack an upcoming issue before it is seen in the historical results. The likelihood of a successful outcome is higher, and the cost of the rectification is lower.

The case for rolling forecasts has never been higher.  

Adrian McKelvie is an experienced chief financial officer and principal at Virtual CFO Support.

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This story first ran in Australian Ageing Agenda

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