2020 was an unprecedented year for all of us. The whole world got turned upside down, leaving many of us not sure what to expect the next day.
Where there are socio-economic factors each year to consider, 2020 brought us the US general elections, the continuing of Brexit negotiations, and more. And then the Coronavirus pandemic started to take fire, affecting the global and local economies of countries. Nobody is immune, and I would guess that this year will still be challenging, your company strategy must be clear and to the point. Across all industries, companies are affected, some a little better than the others. Unemployment rates rose to the highest levels in decades in some countries. Travel slowed down to a near halt. The list goes on. The companies that are most affected by the pandemic are Small and Medium Enterprises (SME’s).
The one thing we can all agree on is that everyone’s budgets for 2020 became irrelevant in an instance. The traditional budget process became redundant in almost all companies. Or it probably should have. So why should it change and what method should it change to?
Types of Budgets
There are various types of budgeting methods out there and many variations to budgets and the budget process. But let’s focus only on a few that are most widely known and used. These are:
- Traditional / Incremental Budgeting
- Rolling Forecasts
- Zero-based Budgets (ZBB)
- Reforecasting
Traditional / Incremental Budgeting
The traditional method of budgeting is taking the prior year’s actual and increasing the amounts with inflation or some growth expectation factor. This is the simplest form of budgeting being used. We all are familiar with this type of budgeting.
Rolling Forecasts
Rolling forecasts are the forecasting of budgets on a periodic basis, usually every month or quarter, for the next 12 to 18 months. These types of forecasts have gained some traction over the last decade and are widely used by companies.
Zero-based Budgets (ZBB)
Imagine starting every year’s budget with a clean slate. You must think what to budget for based on what you perceive would happen and putting a number against that.
Re-forecasting
Reforecasts are done when something significant happens that will affect your company. When something happens, you update your budget.
Which one fits?
We are all thinking the same thing, with all these methods, which one fits your company.
What the pandemic did was to show us how relevant a budget can be. Companies had to look at their budgets and adjust to consider all the changes that Covid created around the world. Companies had to take a hard look at their budgets and expectations and create a realistic estimation of what would happen in the next 12 months, this changed companies’ perspectives as well, with less emphasis given to longer-term planning but rather planning for the shorter term, whether it is right or wrong. Everyone has seen it, and some have felt it, lay-offs, retrenchments, and companies closing during this unprecedented time. A company’s cash flow is becoming even more crucial to manage now.
Some industries are less affected by the pandemic, but the majority is affected by the pandemic. How did some of these companies change the way they do budgets or changed their view on budgeting. The sad truth is that not all companies are set up to change their budgeting method that quickly. Some budget methodologies do take up employees’ time and few companies have that capability built in their workforce. Information Systems are playing an important part in decreasing the turnaround time for creating and adjusting budgets. This did spark a renewed focus on digital transformation and the fourth industrial revolution (4IR).
Which methodology should you use? The answer is not so easy though. There is no right or wrong answer in this case. You must look at your capabilities and your industry to accurately assess which budgeting methodology will work for you.
Rolling forecasts and Zero-based budgeting (ZBB) usually fit with companies that have Information Systems to assist them. Companies whose operations are now more volatile than before will benefit from adopting rolling forecasts. If a company’s cash flow is constrained it is best to opt for the Zero-based budgeting approach. Many companies are already using zero-based budgeting in areas such as Travel & Accommodation expenses.
Reforecasting, on the other hand, is a nice compromise between traditional budgeting, rolling forecasts, and Zero-based budgeting. Specifically, if you do not have the workforce capability for the other methodologies, or do not have information readily available. This method of budgeting allows you to only reforecast when something significantly happens that has a major effect on you.
Having a capable analyst workforce will increase your effectiveness and efficiency by changing or adopting a new method of budgeting.
Tips And Reminders For Budgeting And Planning
Here are some questions you can ask when endeavouring in adjusting your budget or creating your new budget for the year.
- Changing Economic factors.
- How is your value chain affected by the pandemic?
- What is your product or services value to your customers?
- Does the pandemic increase or decrease demand for your products or services?
- What risk factors will influence your operations significantly?
There are so many ways in the end as to how you can budget that it might be overwhelming, the focus should be to sit down and think about all the aspects of these methods and which one would benefit your company the most Inpigre has a wide and in-depth industry experience and can aid you in developing and implementing this new process.
Complete the form below and we will contact you!