October 6th, 2022
It’s that time of year again when most companies are frantically creating their budgets. But this is not a normal budget year. This is a year of extreme uncertainty! Inflation, supply chain issues, workforce issues, crazy politics and unrest in many countries are all creating a budgeting environment we have not seen in decades. For many in the budgeting and planning world this means late nights, and stress as they try to contort their models to provide the modeling they need in this uncertain world. So, we thought we would share a few things to consider when budgeting in uncertain times. First, we will start with expenses and then look at revenue.
What Got You Here Won’t Get You There!
The models or Excel spreadsheets you used last year are probably not designed to handle the questions executives have today! Companies that use the same templates year after year without updating them for the changes in their industry and world are going to struggle more to gain certainty than those that see around the corners and anticipate changes like interest rates, and inflation. If your models don’t allow you to do “what if” modeling, well you really need to look at a redesign and maybe even invest in more robust tools.
If you don’t have flexible models and software that allows for rapid changes, then it’s like you are mowing your acre lawn with a weed whacker. It can be done, but how long will it take?
If you want to discuss your current models or want to see the power of an industry leading planning and budgeting system, IBM Planning Analytics/TM1, email us at firstname.lastname@example.org.
Change Your Frequency
According to McKinsey in their article, Just-in-time budgeting for a Volatile Economy,
“A volatile economy makes traditional budgets obsolete before they’re even completed.”
We agree, many corporations still do the big annual budgeting process that is outdated the day it is approved. The annual budget process worked in a stable world. But news flash, we are not in a stable world. Changing your frequency to quarterly instead of annual or better yet a rolling forecast will allow your budget to be more current. As the Harvard Business Review article, Three Ways to Bring Flexibility to Your Budget states, “These “just-in-time budgeting” solutions got popular during the 2008–2011 economic crisis but for many were perceived as a temporary fix. Today, with high volatility a permanent feature, it’s time to accept that they’re here to stay.”
At Lodestar Solutions we have been encouraging clients to move to a Rolling Forecast for years. Here’s a link to my 2016 video Rolling Forecast verse Budgeting – Let it Roll. This may be more relevant today than it was when I initially presented this at CFO conferences years ago.
Zero Based Budgeting -
We appreciate that taking last year’s actuals and providing them to business units as a starting point for the budget is easier. However, given the uncertainty and changes in almost every industry, Lodestar Solutions recommends a zero-based budget. By having budget unit owners start from zero, you will cause them to really think about how their department budget has changed or how it needs to change. A zero-based budget mentality will allow team members to reflect and understand how the business drives value and where it is lacking. I am not opposed to providing last year’s actuals, but you really want to encourage people to reflect on changes and anticipate the future. Unfortunately, I believe inflation and employment challenges will be here for a while.
If you subscribe to the Wall Street Journal, check out Zero-Based Budgeting Gains Clout as a Way for Companies to Find Savings.
Outsourcing Verse In-House
Many companies are dealing with staff shortages in their finance and analytics teams. This can result in team members bearing the burden of doing the work of two or more people. This can cause them to start considering their options. This is one of several factors that cause companies to take a closer look at what functions are handled internally vs externally. If you are like many clients and you have experienced attrition during the great resignation, you know how difficult it is to find talent. When you find talent, they are very expensive. These increased labor costs may motivate your organization to think maybe instead of hiring we should outsource. This is a valid question, but it’s important to note that the consulting firms are having the same talent pool challenges. Therefore, we want to remind everyone that in your budget, you need to include an increase in consulting fees. We are seeing inflationary increases in almost every service industry so make sure you are increasing your professional service fees, including IBM Cognos and IBM Planning Analytics consulting. Everyone is raising their rates!
Software as a Service:
Another option to consider when you are faced with staff shortages, especially in IT is to consider moving more software applications to a hosted or Software as a Service (SaaS) model. When you have SaaS your IT department typically does not have to allocate internal resources for patches, upgrades, backups…
SaaS is a good option if your IT resources are limited. Additionally, many SaaS structures like IBM Cognos’ structure allow you to add more users for a short period of time.
Take IBM Planning Analytics on Cloud (SaaS). Let’s say throughout the year you need 100 users in the system but during budget cycles you need 100 additional users for only 3 months. You will pay a small upcharge for users not originally contracted for the year, but you could end up paying only for three months for the budget season users. The result is you have more control over your expenses and therefore cashflow. For more info on what you need to know when moving to the IBM cloud, see our blog, What You Need to Know When Moving IBM Cognos and Planning Analytics on Cloud.
If you are an IBM Cognos or Planning Analytics client and would like to explore an outsourced model where your power user is a consultant contact use at email@example.com.
Having the Right Tools
As a software reseller of IBM Planning Analytic software, I would be remiss if I didn’t remind you that having the right tools for your budgeting and planning process is essential. I am amazed how many mid-market and large organizations still rely on Excel for their planning and budget process. Don’t get me wrong, I love Excel, but also appreciate it’s limitations. One of the things to consider when budgeting in uncertain times is the tool you are using. If you want flexibility and to be agile in your planning, you need software that helps streamline the modeling and planning processes.
If you would like to learn what industry leading tools like IBM Cognos Planning Analytics can do for you, join us on Thursday Nov 10, 2022, at 1 PM Eastern for our webinar Tackling the Top 3 Performance Management and Budgeting Struggles - Talent, Time and Tech.