Mark: Just as you do not need a map for your daily commute to the office, if your business is stable and doesn't change month-to-month, quarter-to-quarter, you probably will not find a need for budgets.
Betsy: Some executives believe that our fast-paced world makes 12 months too long of a planning period. That the farther we get from the actual planning, the less relevant the budget becomes.
Harold: Yes, but a budget creates a baseline plan for your expected revenues and expenditures and provides you with a map of where your operational capital resources are allocated. Then, when the unexpected happens – good or bad – you are able to respond more quickly.
Mark: That's true, if you want to take your business to someplace new, or your business environment is changing, then having a financial map -- which is what a budget is, can save you a lot of missteps, wasted effort and frustrations.
Betsy: The frequency of management reviews of actual to budget results will also vary depending on industry and stage each company is in. For emerging companies and companies in more volatile industries it would probably be beneficial for the management team to review budget to actual results on a monthly basis. For more mature and less volatile industries quarterly reviews would be more optimum.
Harold: For companies in volatile markets or going through a period of acquisition or growth budgeting helps you to see the potential challenges you may have cash-wise in advance, so that you can adjust revenues and expenditures accordingly.
Betsy: If your organization is going through rapid change, the mid-course corrections needed when actual results are compared to budget should be more easily managed and everyone on the management team should have a good understanding of the targeted results. The hard work put into developing a budget pays off in more time saved when results are being monitored against the budget.
Mark: That's really the issue here, management resources. How much time should the management team spend in budget review and how often. For many clients, it's more important to have really strong internal accounting reports that track cash flow, profitability and the balance sheet. For these clients, I spend more time reviewing the deviations and exceptions with them because managers only have so much time to devote to financial reports.
Betsy: The value of the budget is truly to translate an organization's business plan to a financial map in order to gain intelligence on the viability of the plan. By putting plans into a budget, the financial limitations will be clearly understood and the executive team will be able to prioritize initiatives before funds might be inadvertently spent on lower priority initiatives.
Harold: And no surprises. By putting annual business plans into a budget a company will obtain clarity on what is really envisioned by various initiatives and the resources they require.
Betsy: At the Florida CFO Group we understand that optimum periods for plans vary depending on industry, company growth stage, and other factors. However, monitoring budget to actual results helps teach your executive team about accuracy or inaccuracy of various assumptions used in the budget. This is valuable since on every successive round of budgeting the assumptions should improve in accuracy – as will your planning -- basically it's an iterative process.