The COVID-19 pandemic has changed the entire economic situation of the world. It has affected all sectors of the economy and forced companies to adopt a revamped budgeting strategy. As we come out of the pandemic but enter a world of economic uncertainty, businesses are once again faced with the challenges of redesigning the budgeting processes – this time armed with the lessons learned from the pandemic.
Every business will have some strategic goals that it aims to achieve. A descriptive road map detailing performance indicators and parameters is necessary to make this possible. Re-imagining the budgeting process for the new way businesses are run makes it possible to unlock deeper insights that can help businesses adapt to changes.
5 steps CFOs can follow to remodel their budgeting procedures for 2022
A perfect budget is a difficult thing to achieve for any organisation. And with the volatility of the current global market, a “perfect budget” might not even exist. But you can have a better budgeting process by following a few simple tricks. Some of them include:
1. Pressure-test scenarios
COVID-19 surely pressured many companies to revamp their strategies in all areas of business. Businesses have learned to make strategies based on dire assumptions and worst-case scenarios. While the pandemic has subsided a little, recent warnings of an economic downturn make it even more crucial to reanalyse and stress-test the decisions, scenarios, and assumptions made at the height of the pandemic.
Every different department in the organisation, be it production, marketing, or sales, should be on the same page. They should have a common understanding of distress response and recovery.
Evaluation of the previous assumptions
The foremost step to creating a better-performing budget is to evaluate what actually transpired during the pandemic and previous economic crashes. The finance department should evaluate which of the scenarios they predicted materialised. They should also analyse the effect of their initiatives on the various performance parameters of the company, like revenue, pricing, competition, and sales volume.
One of the major issues companies faced during the pandemic was the closure of traditional, physical stores. Several companies invested in online sales and marketing and opened online stores to keep their businesses afloat. Now, in most places, offline stores are becoming functional. This means that finance departments and CFOs should devise strategies and assumptions focusing on real-time elements. They should evaluate the increase and decrease in sales volume in the previous months and if the current trends will hold for longer periods of time.
Individual stress tests
It is also good to carry out an independent pressure test for various strategic plans of the company. This will give the managers a good idea of which of the plans can be pursued successfully. The stress test should be done individually for all departments of the company, like finance, sales, and marketing. This will help you to determine the steps you should take in individual departments to achieve the set goals.
2. Consider zero-based budgeting
COVID-19 saw many companies adopting, albeit reluctantly, a zero-based budgeting strategy to substantiate expenditure and secure business continuity. The same strategy can be continued in the post-pandemic times to have a better performing budget.
During the pandemic in 2020, the question that business managers asked changed from whether to switch spending to how much to spend and where. Numerous companies reallocated their funds to areas and activities they considered important. For instance, hospitals have started spending more on telemedicine rather than on travel budgets and conferences. This made financial managers realise that budgetary financial allocations do not have to be as rigid as they once were.
So, while designing a budget for 2022, you need not allocate money for activities you do not plan to do in the coming year, like real estate or travelling. This amount can be reallocated to more important and critical tasks that can help the business succeed in the long term.
3. Build flexibility into budgets
A flexible budget is a budget that changes based on production levels and revenue. Flexibility will allow you to make changes to the original budget plan of your company based on actual production and sales volume. There are several advantages to having a flexible budget. Some of them include:
- There can be abrupt changes in the market that can change manufacturing costs drastically, affecting your revenue. By having a flexible budget, you can include these changes and upgrade your budget.
- Real-time information can be used to update a flexible budget at any time. This will help you adjust expenditures and revenues whenever some new changes arise.
- Some businesses are seasonal, which means you might incur high inventory and labour costs and high revenue during peak months. These might be considerably lower during off-seasons. You can make these adjustments in your budget properly if you are using a flexible budget.
4. Maximise finance team expertise with high-priority projects
The pandemic has totally changed the way a finance department works and this change will prove to be a critical point of concern for businesses moving forward. In economic recessions, such as the one experienced during the pandemic, businesses needed people to work faster, solve high-priority issues instantaneously, and pitch in to help irrespective of their specialisation. This mounting work caused a huge amount of stress on the finance teams. The managers can allocate work based on their priorities to avoid unnecessary pressure and burnout.
Using digital tools can help reduce the pressure on the finance teams to a great extent. Accounting software and accounts receivable automation, for instance, can prevent efficient teams from doing mundane tasks such as generating and sending invoices. B2B digital payment platforms also take a huge load off finance teams since they do not need to manage each facet of the payment system manually.
5. Revise the decision-making process
In this post-pandemic era, decisions cannot be made unilaterally by company heads. The CFOs should understand that input should be taken from managers at all levels and departments before making a strategic decision. The finance teams and CFOs should be transparent about the performance indices relevant to the budget and other relevant financial strategies. These budget plans and economic goals are the factors that drive individual and company performance and should be monitored carefully. Since traditional methods will not hold much in the post-pandemic era, CFOs should rethink their incentive strategies to motivate employees.
Companies can also resort to faster decision-making by organising a small, highly-skilled group of employees to make decisions during emergencies. The business analysis meetings can also be abridged by focusing only on important topics like trends, opportunities, and risks.
How to get started with the new budgeting models
Budgeting models can be reimagined by CFOs to create strategic plans that allow flexibility and can improve the revenue of the company. There are two major tasks involved in making a budgeting plan:
- Reviewing the previous scenarios and assumptions and conducting pressure tests on the revised strategies
- Converting the revised strategies into an actual budget.
CFOs can assemble a qualified team to complete this process. Both these tasks can be done in parallel. But there should be an understanding between different teams, especially when there is a major shift in strategies.
The post-pandemic years continue to be a challenge for every business. It has forced numerous businesses to remodel themselves and their budgets to stay relevant and strong in the changing world. Companies should implement the lessons learned during the pandemic and aim to develop financial strategies that can survive in the long term.
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