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Planning & budgeting during relentless change

This is the first in a series of three articles considering whether budgeting and planning is now an outdated discipline. Given the rapid rate of change and high levels of unpredictability in the world today, should accountants press reset on the corporate performance management landscape? In this article, Phillips wonders if you can plan, forecast and budget when once-in-a-lifetime events seem to take place every other week.

Were you also starting to breathe a bit easier towards the end of 2021? Although we were by no means out of the woods, it felt like we were learning to live with the global pandemic and that business activity in many sectors was as busy – if not busier – than it had for quite some time. While life was by no means certain and predictable, it felt like things were starting to level out. And then came the announcement from South African scientists about their discovery of a new Covid-19 variant, later named Omicron, and the carpet was pulled out from under our feet again. Starting with the UK, overnight many of the largest global economies instituted travel bans against South Africans, and we were back in a state of rapid change and lack of control with little ability to predict the future.

When I was writing the first draft of this article I rather optimistically, and hopefully, said that “while the short, sharp shocks at the start of the pandemic (when economies and borders closed almost overnight) have given way to the current waves of longtail impacts, these are no less disruptive.” The short, sharp shocks are, it seems, still here, layered over the longtail effects of the pandemic. The latter include the return to our offices and evolution of hybrid working, the ebb and flow of partial lockdowns as infection and vaccination rates fluctuate, and businesses’ move from survival mode to a growth orientation. This, unfortunately, illustrates the broader point I wanted to make which is to ask how any company can feasibly scenario plan today? How do you plan, forecast and then budget when once-in-a-lifetime events seem to take place every other week?

How do you plan today? The days of four financial quarters in a year, rolling up to an annual budget and planning cycle that would set the scene for the following year seem like a distant memory. The thought of mapping out 12 months in advance now seems laughable and antiquated. It is completely counter to all we’ve experienced in the last two years.

But companies that shift from a conservative reactivity and survival mode to a more future-orientated growth attitude not only emerge from a downturn stronger, but this upward trajectory stays with them for up to a decade. McKinsey research saw this happen in the wake of the 2007-2008 global financial crisis, and we are already seeing a K-shaped recovery curve during the health crisis – with the gap between winners and losers increasingly widening.

How then do you plan for the unplannable, and avoid getting trapped between analysis paralysis, too many choices and lack of resources on one hand, and over-confident tunnel vision on the other? How do you allocate a budget to each planned activity? Where do you cut, where do you add, and where, basically, do you place your bets?

Stop trying to predict the future I would suggest that you start by acknowledging you’re never going to be able to predict what is coming down the line. Things could all change by the end of the first quarter, for better or for worse. Instead, your focus should, I believe, be on building the personal and organisational resilience, flexibility and agility to make the most of opportunities, minimise the impact of challenges, and turn challenges into opportunities. At a practical level this means breaking down each hit, as it arrives, and figuring out which of your core business drivers and assumptions are impacted. How will your projected volumes be impacted? What does this mean for your employee headcount? What is the exchange rate and what is inflation likely to do?

Accountants have a model for this already: zero-based budgeting. Taking a zero-based approach to budgeting and forecasting using financial modelling, companies can sidestep their reliance on experience and historical trends. Instead of looking backwards and extrapolating from the past, companies can look at their own predictions, coloured by their own experiences and expectations, relevant to their unique set of circumstances.

Your financial model is now rooted in reality, your numbers can be tested against a myriad of flexible assumptions, at very granular levels, and across your entire organisation. These best estimates may paint a variety of pictures of what your tomorrow may look like in a somewhat uncertain future.

Rolling with the punches If you do this, and have enough built-in flexibility to adapt and respond, you don’t need to plan and budget for the unknown but can cater for its effects. And then, even if your international flight to that important meeting does get cancelled overnight, you have set yourself up to survive and thrive.

In Phillips’ next article, he explores whether it is possible to budget at the speed required today.

As published in BusinessBrief - April 2022


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