Creating a Living Budget for Your Business
Owning a business can seem uncertain at times. This may be a good reason to create a living budget. A living budget is based on the idea that in today’s fiercely competitive marketplace, business models change much quicker than they did a decade ago. Although the budget prepared in the fourth quarter of the previous year looked good, six months later the story may change.
Any number of factors, such as losing a key sales rep, having a competitor go out of business, or experiencing a significant increase in the price of raw materials to produce your products, may cause the best prepared budgets to be useless by midyear. So, you may want to keep in mind the following terminology when preparing budgets to ensure that the process doesn’t become stagnant during the year:
What ifs: A what‐if analysis is just as it sounds. That is, if this happens to my business or in the market, what will be the impact on my business? If I can land this new account, what additional costs will I need to incur and when to support the account? Utilizing what‐if budgeting techniques is a highly effective business‐management strategy that you can apply to all levels of the budgeting process.
This example presents a company’s original budget alongside two other scenarios, one of which is a low‐case scenario and the other a best‐case scenario. By completing what‐if budgeting, XYZ Wholesale, Inc., has provided itself with a better understanding of what business decisions need to be made in case either the low‐case or high‐case scenarios are realized.What‐if forecasts.
Recasts: When you hear the term recast, it generally means a company is going to update its original budgets or forecasts during some point of the year to recast the information through the end of the year. Companies are constantly under pressure to provide updated information on how they think the year will turn out.
Everyone wants updated information, so at the end of select periods (for example, month end or quarter end), the actual results for the company through that period are presented with recast information for the remainder of the year to present recast operating results for the entire year (a combination of actual results and updated projected results).
Having access to this type of information can greatly assist business owners so that they can properly direct the company and adapt to changing conditions, not to mention provide timely updates to key external parties (on how the company is progressing).
Nobody likes surprises (more exactly, nobody likes bad ones), and nothing will get an external party, such as a bank or investor, more fired up than a business owner not being able to deliver information on the company’s performance.
Rolling forecasts: Rolling forecasts are similar to preparing recast financial results with the exception that the rolling forecast is always looking out over a period of time (for example, the next 12 months) from the most recent period end.
For example, if a company has a fiscal year end of 12/31/14 and has prepared a budget for the fiscal year end 12/31/15, an updated rolling 12‐month forecast may be prepared for the period of 4/1/15 through 3/31/16 once the financial results are known for the first quarter ending 3/31/15. This way, you always have 12 months of projections available to work with.
Rolling forecasts tend to be utilized in companies operating in highly fluid or uncertain times that need to always look out 12 months. However, more and more companies are utilizing rolling forecasts to better prepare for future uncertainties.