Budgets: A business straightjacket?

By Jerry Davison

Budgets are a useful tool in monitoring progress against the achievement of a company’s overall strategy. However, when poorly utilised, they can restrict and stifle the abilities of both managers and staff: acting like a straightjacket, demoralising staff in the constant pursuit of numbers.

To be valuable tools, financial budgets should gain buy-in rather than indifference. Staff must see how the budget relates to the overall strategy and their individual aims and objectives. It also requires financial forecasts to look at the short and long-term, if staff are to engage with the budget and find it useful in quickly and accurately understanding progress.

Unlocking potential with rolling financial forecasts

When developing financial forecasts, there’s an unhelpful tendency to focus on the 12-month block up to the year-end. This is often at odds with project timescales, seasonal sales differences and various other factors.

Equally, for day-to-day management and operations, it’s important that staff have a clear and accurate picture of their current progress and financial flexibility. Fluid financial forecasts, that take account of monitored figures and adapt forecasted figures, provide more accurate and achievable figures – often tuneable to different timeframes.

For rolling financial forecasts to be effective, an accurate and up-to-date monitoring process is needed. This not only needs to include regular (daily or weekly) sales data, but also qualitative information such as feedback from staff on how forecasts might be effected by internal or external factors.

Making monitoring effective

At the core of effective rolling financial forecasts is effective and accurate monitoring.

Reporting templates should work in favour of the staff, capturing the necessary information whilst taking minimal time to complete. They should allow monthly, quarterly or even continual monitoring: and link back to the financial forecast projections for relative periodic adjustments.

Effective reporting templates can be designed in parallel with training staff in their use. This approach ensures the templates benefit from everyone’s knowledge, and everyone has ownership of how their achievements are acknowledged. Whilst some businesses use proprietary or outsourced systems, effective templates can be produced in Microsoft Excel.

Different parts of an organisation will have different reporting and access requirements. Designing different input sheets, tweaked to each element of business, will help streamline the process.

The length of rolling financial forecasts varies. We’ve found that 15-month rolling forecasts are the most popular. At the end of each quarter or month, depending on how often the financial forecast is updated, a fresh 15-month forecast is produced – adjusted using the monitoring data.

Strong companies use business intelligence to underpin decision making: speeding up and honing the accuracy of decisions across an organisation, helping increase profit margins by being more reactive and in the right direction. When designing templates and the overarching financial monitoring systems, you should ensure they can provide:

1. Progress reports, tweaked to suit different levels of an organisation. These could simply be a spreadsheet, or template reports dynamically linked to the monitoring database. These may include some basic gap analysis, but this is often included separately within variance reports.
2. Variance reports, highlighting where and how figures have differed from forecasts. These help identify areas of strong profit and weak performance. Where weak performance is due to internal rather than external factors, managers should use their diplomacy to support and not bully staff. With care, they are a useful tool. Without, they can set in the toxic ‘us and them’ attitude.
3. Ability for relevant staff to identify and incorporate business drivers; create project plans and budgetary forecasts.
4. Automation with technology wherever possible, for instance with stock management systems.