Scenario planning and annual budgets

7 01 2010

Did you make a annual budget for 2010?

Bet it wasn’t easy.

Did you think about all the different scenarios that might happen in 2010, and incorporate those variables into several budgets, or was your final product one single annual budget?

I am not a fan of annual budgets unless they are tied into Scenario Planning.

I believe that they are a necessary exercise that helps in anticipating what revenue and resources a company might require in the coming year.  But I truly dislike those who compare real results with a static budget created 6 months or a year prior.

Businesses cannot perform  “as planned” in rapidly changing environments.  Budgets can serve as guides for spending and investment if properly assembled, taking into account internal and external factors of influence.

I am almost sure your budget made in October or November needs to be redone (if you want it to reflect real results) in order to reflect the massive changes that have already occurred in the economy and business environment.

In chaotic times, when uncertainty is the only sure thing, the traditional budget process can be a waste of time for the people making them, and for those “using” them if scenario planning is not taking place.

When the environment is subject to so many significant changes that will affect our suppliers, costs, customers consumption, international competition, etc., it is wiser to make several budget scenarios.

These scenarios will contemplate and plan for possible (or impossible) significant changes in the business environment, and help the organization to quickly take advantage of the situation when and if they occur.

What if oil prices plummet, or skyrocket?

What if inflation takes off, or recession gets worse?

What if there is a massive terrorist attack?

What if there is an economic collapse in Asia?

What if our number one supplier closes their doors?

What if the automobile and construction industries fall deeper into a slump?

What if the USA puts huge import duties on imported products?

It’s not about guessing what will happen (traditional budget).

It’s all about preparing to what MIGHT happen (budget scenarios).

How many scenarios should a company create?   As many as possible in order to analyze the strategic impact on the entire supply chain, cost structure and customers buying patterns.  It’s having a battle plan A, B, C, and D.

This budget scenario exercise is an ongoing process that involves risk assessment, prediction of economic consequences to potential or real events, and should involve the entire management team.  Depending on the actual environment and conditions this assessment might take place several times a year.

The identification of risk areas that will have significant effect on revenue or costs,  and the  acceptance that things will continue to change, will enable your organization to thrive and survive during turbulent times.

Links

How to do Scenario Planning

Scenario Planning

The Secret of Successful Scenario Planning


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