In our business, we think a lot about budgets.  And we talk to lots of business owners who are thinking about budgets. And we talk to lots of business advisors who are thinking about budgets.

What I’ve learnt after all that thinking and talking is that we have a problem … budgets just aren’t living up to their potential.  All the time, effort and resources being invested in budgets are not delivering the returns that businesses are looking for.

Now, call me crazy, but I love budgets.  More precisely, I love what a well-crafted approach to budgeting, forecasting and planning can do for a business.  We’ve seen many businesses turn their planning cycles into strategic assets that drive growth in profits, cashflow and business value.

So, let’s look at some of the biggest problems businesses are having with their budgets

1. Budgets are out of date too quickly, so they’re not worth the investment. Market conditions, customer demand, costs and so on change so rapidly that the budget you spent months lovingly crafting is now irrelevant.
2. For some businesses, customer demand is so unpredictable that any budget is little more than guesswork, so why bother budgeting?
3. Budgets create the wrong tensions in a business. The budget process becomes a competition that pits management against staff, sales against operations and finance against everyone.

These are fair criticisms and real problems that businesses are experiencing.  But, they’re also symptoms of the traditional approach, something we call ‘lazy budgeting’.

The good news is that the world of budgeting is waking up and getting its groove on.  Here’s how we might solve these issues by taking a new approach

1. Because budgets do go out of date, we prefer using rolling forecasts. This means that the budget (or forecast, or projection, call it what you will), is continually being updated and extended so it represents a ‘best view of the future’.  Because the future numbers are more reliable, they are a much better basis for making critical business decisions, so the rolling forecast becomes a key management tool.  This approach also means that the old days of fixed numbers on an excel spreadsheet are over.  Rolling forecasting means we need to create dynamic business models using a 3-way forecasting approach, so that the Profit and Loss, Balance Sheet and Cashflow are automatically linked (more on this in another article).
2. We move away from the idea that budgets should be trying to predict the future based on a fixed set of assumptions. With a well-built dynamic model, we can work out the financial outcomes for many sets of assumptions at the same time.  We narrow this down to several of the most likely scenarios and then design strategies and action plans for each one. This means we are well prepared for even the most unpredictable situations.
3. Traditional budgeting is popular as a means of controlling costs. But, we have seen too many cases where good investments, promising opportunities and ideas with potential are not pursued because ‘they don’t fit in the budget’. Rolling forecasts and dynamic models let us move away from rigid budget-constrained thinking to a more commercial approach where ideas are assessed on their merits and pursued if they fit the business strategy.

So, it’s time to call an end to lazy budgeting.  It’s time to stop wasting time and money on budgets that make no difference.  It’s time to take on a much more dynamic approach and start getting real strategic value out of our planning cycles.

About the Author:

Michael Ford helps businesses design a better future.

Thought Leader| Growth Architect | Business Advisor| Speaker | Entrepreneur | Software Developer 

Michael is founder and CEO of Castaway Forecasting, the world’s most powerful business forecasting and modelling SAAS tool for SMEs and their advisors. 

Drawing on more than 30 years experience as an accountant, entrepreneur and business advisor, Michael envisioned Castaway as a transformative tool to change the future of business. Today, Castaway is used by half of the top 100 accounting firms in Australia and the UK, and helps solve cashflow, profit and growth problems for thousands of forward thinking SMEs across the globe.

In Michael’s journey from accountant to entrepreneur, he has tasted failure and enjoyed success. He advocates for curiosity, creativity and growth by design and engages global business audiences to unlock their possibilities and design a better future. In his spare time, he is dedicated to finding a cure for cancer with charity Tour de Cure, leading by example and inspiring positive change.

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