Flexi-budget - Planning for uncertain times

Author: Ash Mehta

During these uncertain times, companies need to maintain the discipline of good planning and budgeting, but how can you plan and budget when the goalposts keep moving? Orchard Growth Partners is rolling out a flexible planning and budgeting methodology which allows companies to prepare flexible and layered budgets. To find out more about Orchard’s approach to flexible budgeting contact us at http://www.orchardgrowth.com/.

Entrepreneurs are tired of all the gloom

Everyone’s back from holiday, the beachwear has been packed away for another season and thoughts are starting to turn again to business.

Many of the entrepreneurs we work with have had enough of all the gloom over the last twelve months. They didn’t set up their businesses to manage the cutting of costs. Entrepreneurs set up businesses to bring their ideas to life and grow them further, and that’s want they want to return to now.

Having said that good entrepreneurs will have used the last year to adapt their business models to the challenging times as well as to make their organisations leaner, fitter and better run.

This time last year the climate of uncertainty was such that many SMEs simply didn’t bother to preparing plans or budgets as they didn’t know what assumptions to use. Was the banking crisis just going to affect the

City or would the problems seep across the country? It was only when the Woolworths name disappeared from the High Street that people began to accept that the collapse of Lehmans and HBOS would affect them and their businesses too.

So, many companies have been working without detailed plans and budgets and there’s a danger that some companies will not get back into the discipline of a proper planning and budgeting process.

Is it any easier to budget this year than last?

Well, some people would say not much easier and we have sympathy with that view. However, going a second year without a proper budget just sounds too risky. Therefore, we’re recommending that our clients prepare flexible budgets, in a format which can be readily adjusted to cater for changing circumstances.

There is uncertainty. Companies may not know, for example, when they will appoint a new sales person. In which month should the costs be budgeted? When should they expect revenues to increase from that appointment? When will they open the new office they postponed last year? When will they launch the new product that’s been in development?

Budgets always have assumptions – that’s their strength and their failing. However, if you use budgets properly to monitor performance then how can you hold the management team accountable when there are such big unknowns?

Flexible budgeting

Orchard Growth Partners is rolling out a flexible budgeting methodology which allows companies to prepare flexible and layered budgets. The approach budgets for your business in layers eg. a layer for the ongoing business (split into departments if appropriate), followed by layers of new activities eg. new locations, new headcount, new product launches. Companies can then include or exclude these new activities. For example, what happens if your company decides not to launch that new product? What does it mean for 2010 revenues and profits? Companies can also compare different courses of action and decide which components of growth to include in their final budget.

Once the budget is agreed, Orchard can assist in rolling the budget forward every month, to produce forecasts and adjusting and amending the budget as appropriate. The last thing an entrepreneur wants to hear in their business is “You can’t do that – it’s not in the budget!” This phrase is guaranteed to cause maximum frustration to anybody involved in trying to grow a business. For businesses in this situation, it’s time to throw off the rigidity of traditional budgeting and embrace the concept of flexible planning.

Business moves fast and budgets rarely keep up

It is a sad fact of life but a budget is more than likely to be out of date virtually the moment it is completed. Business today moves very quickly and it is vitally important for any business, big or small, that its planning processes are flexible enough to move with it. Therefore every new opportunity or setback should be used to review business plans and reset business goals. Maybe that salesman will land a long sought-after contract.

Perhaps that merely promising product can become a key product with some marketing. Therefore, the business owner should examine the options, recheck any constraints that might exist and use the opportunity to prepare a new forecast to refocus your business priorities. By doing this, the new forecast may actually end up exceeding the original budget.

The secret is to combine a budget with a series of regularly updated rolling forecasts that replace the often backward looking comparisons with budget, and focus on the requirement to know where the business is going rather than where it has already been.

Remember – budgets and business plans are designed to help the business – don’t become a slave to them!

To find out more about Orchard’s approach to flexible budgeting contact us at http://www.orchardgrowth.com/.
Article Source: http://www.articlesbase.com/strategic-planning-articles/flexibudget-planning-for-uncertain-times-1397272.html

About the Author

Ash qualified as a Chartered Accountant with KPMG London, and has worked in finance and commercial roles for Eli Lilly, and Parexel International, a NASDAQ-quoted services company. He has also been Finance Director and Stategy Director of growth companies both Full-listed and AIM-listed, including Ultrasis plc and Raft International plc.

Writing a New Budget

Committing your budgeting plans to paper - or to a budgeting software program - is a useful step because it provides a visual reminder of the new budget. Making the commitment also makes it more likely that the budget will be followed.

Enter the big debts and income first. Then prioritize the smaller debts in order of importance. Things like lunch money and buying laundry soap might not seem all that important to a budget, but if there is no money left for them, they will seem very important.

Things to Consider When Gathering the Information to Create a New Budget

If you're trying to create a new budget - chances are you have already had a budget and it didn't work out.

While gathering the basic information you need to set up the new budget - take a moment to think about why the old budget didn't work.

Maybe the failed budget didn't leave any room for emergencies or for a favorite entertainment activity. Maybe the income was simply not enough to cover all of the debt.

Expect Emergencies and Budget for Them

Emergencies always happen and if there is no contingency plan ina budget - an emergency can crush a budget. Emergencies may be small like a broken pipe or a forgotten birthday or something so big it's hard to even imagine.

A budget will be the most successful if the person making - and using it - is honest with themselves about who they are and what their needs are.

Don't Forget to Keep money Aside for Simple Pleasures

Someone who loves to rent movies or eat out (or whatever the luxury of preference is) is not going to be happy living on a budget that doesn't allow for those treats.

Remember the Small but Important Details

If small details are not included in a budget it is really easy to set up a budget that is doomed to fail because the income simply won't cover all of the debt. It is easy to overlook things like school lunches and gas for the car but these things have to paid for regardlesss and they will break a budget if they are left out.

A budget will be the most successful if it includes an emergency fund of some sort as well as a fund for the things that make life worth living - what that means has to be decided by each person.