Finance Managers sometimes have to deliver the bad news, such as telling Business Unit leaders they need to restart the budgeting process because the company has diverged from its strategy.
Creating a budget with six months' actuals and six months' forecasts is one way to do that rework. The most common budget in my practice is the 6+6 budget. With six months of actual numbers we’re in a much stronger position to accurately forecast the remainder of the year. If expectations built into the budget aren’t materializing, then it’s time to recalibrate.
Recompiling mid-fiscal-year budgets is a burden not only for business leaders, but also for finance staff. This is true even when you are rebudgeting because sales are higher than anticipated. You don’t have to worry about morale and attrition in those cases, but you are still asking for a lot of unplanned work.
A situation where actuals and budgets diverge significantly can be approached in two ways.
Scenario 1 — tactical reforecasting: Board-approved budget remains unchanged. According to the CFO, we will continue to support and push sales by investing more in our key strategic areas. You do not need approval if you increase by, say, 5% or less. If you want to increase by more than 5%, you need executive approval.”
Scenario 2 — strategic rebudgeting: In the case of significant variation in sales, such as a 100% increase or a 30% reduction, the FM has to adjust the budget accordingly. This implies that the focus of investment efforts is moved away from where it initially had been and should be diverted towards sectors with greater returns. When growth follows expectations, there is an air of optimism in the organization. Conversely, when sales don't meet targets and financial difficulties come up, savings must be made – leading to worries both at top and bottom of the management ladder and resulting into staff changes.
It depends on whether you need to reset not only short-term targets (Scenario 1), but also long-term goals (Scenario 2).
We've established that rebudgeting is always a big deal for several reasons. So why do it?
The budget-versus-actual roadmap sometimes diverges so far from your original plan that it no longer provides actionable guidance. It's useless moving forward, and targets need to be reset. When sales have significantly disappointed, major, strategic cuts may need to be made, and that requires careful thinking. The board, too, must buy in.
It is never advisable to rebudget downward unless goals are truly unattainable. Asking people to achieve those unrealistic targets will damage their morale. You risk giving everyone permission to be mediocre if you rebudget lower when you could and should have pushed harder.
Reach goals encourage hard workers to say, "Okay, we're really gonna do it in the second half of the year." Instead of, "Okay, phew, now we can just keep going at the same (unimpressive) rate."
If you’re doing a 6+6 right, stakeholders across the organization will question all assumptions. The process is very hands-on, almost to the point of being intrusive. Beware of superficial efforts and backchannel complaints. To successfully rebudget, these will need to be managed.
Here are 5 signs that you need a 6+6 budget
