Better forecasting and budgeting
A company's time honoured forecasting principle could be to 'extrapolate past sales, adjust with best guesses and make the board happy'. The budgeting process might also be characterised by managers going for 10% knowing they'd be cut back to five then a struggle to deliver overstated objectives. Not impressed by failed promises eventually the stock market will write down a company's value when poor forecasting issues come to light. The annual budget is meant to be an essential mechanism for planning and controlling corporate revenues and costs. It is usually the main, and in many instances the only significant formal mechanism for controlling the activities of employees. Does it do its job? No. In most organisations our survey* found that the annual budgeting process consumes an extraordinary amount of management time, and produces something whose credibility is minimal. Many companies could improve their budget process beyond recognition, turning it into an indispensable management tool. Our work for clients includes: • assessing the effectiveness of the existing forecasting and budget process, identifying problems and advising how improvements could be made. • introducing a process of rolling re-forecasts, concentrating on those costs and revenues that vary regularly and are material. • helping to identify the activities that drive the strategy, making sure they are properly resourced and their results tracked. • identifying costs that are linked to business volumes, and so develop a budget model that enables rapid re-forecasting. • introducing a process by which managers account for their performance every period; differentiating between what is and isn't within their control and assessing their performance against relevant measures, not just costs and revenues. A highly credible rolling forecast system that gives honest good and bad news will drive plans to improve the future and, via cost drivers in the ABC model, will be able to produce rolling budgets with ease. * For a copy of the Develin & Partners survey of 'UK corporate budgeting' please contact us and we will email you the 60 page pdf document.