Budgeting for Uncertainty: What to do When the Unexpected Happens
The business landscape is constantly changing. As a result, you need to be able to readjust your corporate strategy on the fly and sometimes even reinvent your organization to stay ahead of the competition. “Just-in-time” has become the new norm.
To account for this, you must build flexibility and tolerance into your budgeting process. This means understanding periods of growth may be slower or less consistent than in the past. Rather than planning for specific benchmarks, allow your organization to fluctuate within a range.
This article will examine how to budget for uncertainty and provide tips on keeping your company on track when faced with unexpected challenges.
What Is Budgeting for Uncertainty and Why Is It Important?
These days, it seems like everything is in a state of flux. The political landscape is shifting, the economy is volatile, and technology is evolving at an unprecedented rate. In such an uncertain world, it’s impossible to predict everything that could happen to your business. No matter how much you plan or how well you prepare, there will always be some degree of uncertainty.
The best way to deal with this is to build flexibility into your budget so you can adjust as needed. This doesn’t mean completely throwing out your old budgeting process — it means being more open to change and less wedded to specific numbers.
Budgeting for uncertainty allows you to:
- Be more prepared for unexpected changes. Flexibility in your budgeting allows you to adapt to changes more quickly. This can help you avoid crisis mode and keep your business running smoothly.
- Make better long-term decisions. When you’re not tied to a specific budget, you can make decisions based on what’s best for your business rather than what’s easiest to justify financially. This can help you grow your business and stay ahead of the competition.
- Avoid becoming risk-averse. If you’re too focused on sticking to a budget, you may miss opportunities to take risks that could pay off in the long run. Being open to change can help you take advantage of new opportunities.
How to Create a Flexible Budget That Accounts for Fluctuations
There are a few different ways you can build flexibility into your budget.
Plan for a Range of Growth
You can’t always predict how much your business will grow from one year to the next. So rather than expecting a certain level of growth, it’s essential to plan for a range. For example, rather than aiming for 6% growth, you might plan for 5 to 8%. This gives you wiggle room if your growth is slower or higher than expected.
Planning for a range of growth can help you stay flexible and adaptable as your business grows. It can also help you manage your finances more effectively, ensuring you have the resources to support your business at every stage of its development.
Create Multiple Budgets
There’s no one-size-fits-all approach to budgeting — what works for one organization might not work for another. One way to ensure that you’re prepared for any eventuality is to create multiple budgets. For example, you could have an optimistic budget, a pessimistic budget, and a standard budget. This way, you can be prepared for a variety of outcomes.
An optimistic budget is based on the assumption that everything will go according to plan. This is often the best-case scenario budget and can help you plan for success. A pessimistic budget is the opposite — it assumes that things will go wrong and can help you prepare for setbacks. A standard budget lies somewhere in between and can help you strike a balance between being too optimistic and too pessimistic.
Update Your Budget More Frequently
While an annual budget can give you a good overview of your company’s finances, it can quickly become outdated. In addition, unexpected expenses or changes in income can leave you scrambling to make ends meet.
Rather than waiting for an annual budget update, consider updating your budget more frequently. This will allow you to make necessary changes and ensure your budget is always accurate. You can update your budget monthly, quarterly, or weekly, depending on your organization’s specific needs.
Financial Planning & Analysis
FP&A is a process that helps organizations make better decisions about their finances. It involves forecasting future income and expenses, analyzing past financial performance, and using this information to make informed decisions about where to allocate resources.
You can get a clear picture of your company’s overall financial health by utilizing EBITDA. You can use this information to decide where to cut costs, how to increase revenue, and what changes need to be made to improve your bottom line.
Tips for Staying on Track When the Business Landscape Changes
Once you’ve created a flexible budget, there are a few
things you can do to stay on track:
- Communicate with your team. Make sure everyone on your team is aware of the changes to your budget and how they affect the company. This can help avoid confusion and ensure everyone is on the same page.
- Monitor your progress. Keep an eye on your budget and make adjustments as needed. This will help you stay on track and ensure you’re not overspending.
- Be prepared to make changes. Be ready to adjust your budget at a moment’s notice. This way, you can adapt as the landscape changes and ensure your budget always meets your needs.
The Importance of Being Able to Adapt Quickly in a Volatile Economy
In today’s economy, it’s more important than ever to be able to adapt quickly. The ability to budget for uncertainty can help you do just that. Being flexible in your budgeting allows you to adjust to changes rapidly. This can help you avoid crisis mode and keep your business running smoothly.
When hiring for a new GFO, these are concepts that are critical for them to understand. These concepts change in importance based upon the industry and that’s where experience shows.
Contact Ghost Mountain today to find out how we can help ensure that your next CFO has all the tools to manage the business risks that your industry, geographic area and market size encounter.