Six questions to ask yourself to improve your FY21 budget

To maximise the value of your budget, the organisation’s management and finance team should ask themselves six key questions:

Who are you budgeting for?

 

Where are you starting from?

What matters most to your organisation?

 

Who else should review your budget?

Is your model fit for purpose?

 

What do you do when you don’t like the answer?

1   Who are you budgeting for?

The answer to this question will vary by organisation, however ask yourself why are you budgeting and for who. Use this to guide where you are on the probability scale and whether your budget should be conservative or aggressive. Then think how much information your stakeholders need, what the output should look like for different groups and the effort required to build the budget and test the numbers.

 

2   Where are you starting from?
Zero based budgeting still seems to be the buzz word, however, more commonly budgets will start from a sale forecast or last year’s P&L. There are pros and cons to where you start from:

3   What matters most to your organisation?
As organisations move through their business cycle the focus of the business changes. As such, you should make sure your review and amend your budget process to reflect what matters most to your organisation. Overtime this priority and focus might change.

 

4   Who else should review your budget?
There are some obvious people to include, such as key internal stakeholders. But, don’t forget your finance team. Check with the members of your finance team that have to explain the same variances to budget every month and ensure that these have been fixed in this year’s budget process. The easiest way to do to this is to keep a list throughout the year of what you have had to move, journal, explain consistently and use this as a review checklist.

5   Is your model fit for purpose?
If you answer yes to one or more of the following:

It is not an integrated three way (profit and loss, balance sheet and cashflow) model*

 

You have seasonality in your business which is not reflected in your budget

It does not sum, roll up, balance or you do not know whether it does or not because there are no checks

 

It does not include what matters most to your business and you cannot easily change drivers and levers

It is not user friendly and it has hardcoded data overriding formulas

 

You cannot quickly reforecast at each quarter

Your model is probably not fit for purpose and you may need to consider whether more work and / or complexity is required.

With the ongoing spread of Coronavirus creating unique challenges for corporate Australia, having a model where you can easily change drivers and levers is key to being able to quickly adapt your budget. A fit for purpose budget model will enable you to update budgets and operational planning for conservative base case and downside scenarios. The case for a comprehensive risk assessment and response is discussed here.

*As a side note building in the budget functionality of taking a profit and loss budget to a three way budget takes time. Don’t leave it till the end and expect a robust model.

6   What do you do when you don’t like the answer?
Whilst it’s okay to include a “stretch target” in your budget to give everyone something to aim for, you should make sure you understand exactly where that stretch is and build it into the underlying budget via your drivers, levers and key assumptions.

If you have gone to the time and effort to build a budget from the bottom up you shouldn’t just add a one line overlay in your model to get to the number you want. Adding a one line overlay is just concealing a problem, or showing an answer which in reality can’t be achieved or that you are hoping you can achieve but you don’t quite know how yet. All this does is create unachievable hockey stick growth and / or masks sensitive cost drivers which you should be aware of in case you need to reduce costs quickly.

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