Budgeting flexibility essential for uncertain times

The impact of continuing business disruptions related to COVID, the war in Ukraine and inflation have demonstrated that traditional budgeting and forecasting processes that can’t handle rapid changes are actually harmful to the bottom line.

According to the experts at Gartner, making quick-fix moves such as delaying hiring, cutting marketing spend and freezing T&E may be wins in the short-term, but can delay a business’s financial recovery from a setback.

In addition, you may have discovered lately that financial forecasting twice a year is probably not enough for getting an accurate picture of what’s happening in the business and why, and what’s going to happen.

So now’s the time to take a more flexible approach to budgeting and a higher frequency approach to forecasting. In a Gartner survey, almost three-quarters of your peers (72%) said improving flexibility of budgeting and forecasting is a priority.

But how should you go about making budgeting and forecasting more flexible?

Budgeting plan needs to be ongoing

In a press release, Faith Vakil, the director of research in the Gartner Finance practice, said: “The key change in mindset that Finance leaders must adopt is to make trade-offs between business units early and often, rather than trying to stick to an annual plan until the last minute.”

In other words, “budget plan” should be a verb in your organization, instead of a static, unchanging document.

The key to flexible budgeting is scheduling resource allocation reviews throughout the year, then making changes as needed. Continuously reviewing costs as revenue grows helps you take advantage of potential investment opportunities that may come out of a sudden change in business conditions.

Annual budgeting is still useful, but because being able to pivot based on market volatility or changes in consumer behavior is so important, an annual budget should just be a starting point, the Gartner report argued.

Likewise, reviews of cash flow, revenue, expenses and debt reduction to forecast whether your company is heading in the right direction may need to be done monthly instead of quarterly.

To ease the resulting increased data collection workload, cloud accounting and cash flow forecasting software has become accessible even for smaller companies, Gardner said, and it can help you gain a clearer view of your company’s financial health.

There are also “continuous planning” financial planning and analysis platforms – such as Planful and Datarails – that streamline data gathering, run “what-if” scenarios and produce rolling forecasts.

But be selective when shopping for a tech solution, financial planning and analysis software provider Cube said on its blog. “Some are best for those in larger enterprises with big IT budgets, others are suited for existing customers of a software provider, and still others are ideally suited for those that want more flexibility in their software strategy,” one post said.

Flexible budgeting and forecasting “embraces innovation as necessary and normal, and improves funding alignment to changing priorities,” Vakil said.