By: Clara Chua, DigitalCFO Asia | 11 November 2021
Ensuring that your business always has a budget that extends one year into the future
The conventional static budget was embraced years ago during pre-COVID times. Yet, for many modern companies in a complex and dynamic global economy may begin realising the ongoing constraints. These companies have transitioned themselves into implementing rolling budgets to bring about greater flexibility in planning processes and decision-making.
Understanding Rolling Budget
Usually updated monthly rather than annually, these forecasts expand incrementally as time passes, continuously reassessing the company’s outlook. For the process to succeed, it is key that the management team analyses information efficiently to incorporate insights.
The objective is to anticipate the risks and opportunities in an uncertain business environment, revisit strategy in consideration of new business scenarios, and maintain a competitive edge. Providing a refreshed annual budget with realigned spending and resource allocation can provide clearer understanding among employees about the company’s objective.
Best Preparation Practices
The crucial first step in determining the budget time horizon is often overlooked. However, it depends on a company’s sensitivity to market conditions and its business cycle to dictate this decision. In particular, the more dynamic and market dependent your company is, the shorter your time horizon needs to be to react effectively to changes.
With specially designed budget planning, forecasting and analysis software products, companies can spend more time studying the data instead of compiling Excel sheets. A recognised requirement in the transformation is adopting a Corporate Performance Management (CPM) system to help mitigate human error.
This budgeting adjustment will have a less jarring effect, when all relevant stakeholders dedicate the necessary resources and manpower required. Companies may want to take advantage of this change to further improve the process by performing independent stress tests of strategic plans.
Reimagining the company from a zero-based budgeting (ZBB), in which expenses must be justified for each budget period, can determine what levels of spending are truly required to support business recovery efforts. Using ZBB on a monthly basis improves accountability while allowing CFOs to manage costs and meet targets.
Avoid Making these Mistakes
Rushing into a rolling budget without sufficient planning can create confusion due to constant revisions. Employees would be required to spend a large number of hours preparing the budget and implementing change. Inevitably, companies that have decided to adopt rolling budgets for the first time would possibly experience resistance from staff who are accustomed to the established system and scheduling that come with fixed budgets.
Analyse if the company’s industry and conditions are frequently changing before making a sound decision. By incorporating additional training, combined with a collaborative approach to implementation can support a smoother transition.
Rolling budgets may receive a bad reputation for demotivating employees because of the high targets set making it difficult to achieve. However, by avoiding ambiguity and encouraging open discussions with business unit managers can avoid such setbacks.
Impact of Covid-19 on Budgeting Processes
Since the pandemic, Monetary Authority of Singapore (MAS) estimated Singapore economy could have contracted 12.4% if not for COVID-19 budget measures. This crisis has affected sectors in different ways, for instance within the retail industry – while supermarkets and drugstores have fared better, physical stores have been badly affected.
There is a sense of agreement on how important staying agile in the economy is, and how the pandemic has accelerated digitisation and automation in the finance function. Companies have now resorted to moving its financial system workflow to the cloud and installing robotic process automation that can be accessed anywhere.
Achieving a “perfect” budget for 2022 may seem far-fetched, but a better budgeting process can allow companies to be more flexible, confidently shifting resources as needed to survive.