By David Bloom, co-founder and CEO, fd unlimited
It surprises me how often this question comes up, even with some Executives who have held significant budget responsibility during their careers. I think it’s because some organisations have their own specific lexicon and others use the words interchangeably. Whenever I take on responsibility for setting and tracking a budget and forecast for an organisation, I break it down as follows:
The Budget — ‘what you think you’re going to do for the next year before the year has started’
In the last quarter of your current financial year, it’s good practice to set the budget for the next financial year. You may have a Business Plan that needs refining and quantifying. The Board should provide guidance to Senior Management and your Head of Finance should distil these numbers by function to Department Heads. Department Heads will know what the plans are for the coming year and should be given discretion to spend their budgets as they see fit in line with the strategy. Clear guidelines should be given but not too onerous to bog down budget holders in red tape.
You should also consider giving the sales team a revenue target that’s higher than the Board budget — it’s called a ‘stretch target’ and one of the main reasons why all Sales Directors love their FD ;-)
It should be made clear that the budget will be revised quarterly in the last month prior to the start of the next quarter. In other words, although the budget is set for the year, there is no guarantee the money can be spent other than in the first quarter. There are of course exceptions to this but it’s a good guideline.
Having been involved in budget setting for over 20 years, it’s worth mentioning at this point that I believe the static 12 month budget is a waste of time. They suck up significant management time and by the time they are set, they are out of date. A much better approach is to have a rolling 12 month forecast that gets updated every quarter. The 4 quarters that make up your financial year become your budget. All other quarters are forecasts. This works really well, even in the public company environment, saving significant management time.
The Forecast — ‘what you think you’re going to do for the rest of the year you are in’. A Forecast is a revised Budget
Once the year you have budgeted for gets underway, you start tracking against the budget. Let’s take the year to 31 Dec 2012. It’s good practice to do a forecast in March 12 for the rest of the year, a reforecast in June 12 and a final one in September. Note these are in the last month of the quarter before the start of the next one.
As the year progresses your forecast comprises actuals plus forecast. You could save time by simply updating the Budget for actuals as the months pass but this is almost always a false economy, especially in today’s fast moving environment as the Budget gets out of date quickly.
At each month end it’s good to track your performance against the forecast to see if you’re on track. A ‘3+9’ forecast shows 3 months of actuals and 9 months of forecast. A ‘6+6’ shows 6 months of actuals and 6 months of forecast. As the year progresses, the forecast for the year should become more accurate the more it comprises actual months and fewer forecast months.
Reforecasting once a quarter is one of those painful but necessary tasks. Provided you get the process down to a smooth set of steps and it’s managed by your Head of Finance with good project management and leadership skills it helps keep everyone focused and forces the Leadership team to be united in its approach to achieving Company goals.
fd unlimited provides high calibre and cost effective part-time, interim and full-time Finance Directors, Financial Controllers, Finance Managers, Board Advisors and Back-office Services to dynamic companies with aspirations for growth. Our network allows us to match your need with the right resource, in a matter of hours if needed. Find us at www.fdunlimited.com
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