The financial crisis has caused economic stability, making traditional enterprise estimates obsolete before they are even completed. Therefore, enterprises should be more agile in adjusting their finances in response to economic turbulence and timely prepare their budgets. Many companies have found that even in stable situations, preparing a budget is an intimidating challenge. Managers often spend a great deal of time on budget preparation only to find that 4-6 months of effort yields little result, leading to great disappointment. In times of instability, economic forecasts may change weekly, making it even more difficult to establish reliable budgets to coordinate various business departments and track performance throughout the fiscal year. Adhering to traditional budgeting processes can even prove futile. Enterprises can adopt several methods to improve the efficiency of the budgeting process: scenario planning, zero-based budgeting, rolling forecasting, and quarterly budgeting, etc. Among these methods, the most important is a significant enhancement of the role of the Chief Financial Officer (CFO) and a substantial acceleration of the budgeting process.
However, when their trigger points indicate poor performance of a key indicator, executives quickly adjust their capital and investment allocation for the rest of the year. It is important to note that the CFO does not need to implement contingency plans for the entire organization; some changes may be limited to certain specific business units while others continue with the current budget. As such, managers of the affected units must develop and implement new budgets and incentive measures, and reconsider hedging strategies, resource allocation, and financing.
Firstly, scenario planning with trigger events. In more stable times, the budgeting process is usually an exercise in consensus-building to form a unified view of the future to guide the company's investments and returns for the coming year, which is a long and arduous task. Although many management teams informally speculate how their business will grow, few engage in vigorous debates about multiple scenarios or conduct short-term and long-term financial analyses that make such debates meaningful. Thus, this process lacks flexibility and cannot respond promptly to sudden and intense changes in the economy. As the budgeted year progresses, any revisions to the budget are reactive, passive, and ex-post facto actions rather than informed views reflecting various possible future scenarios. However, forward-thinking executives of some companies not only formally plan specific macroeconomic scenarios and business scenarios including some carefully considered extreme cases but also model the impact of these scenarios on their business, consumers, and competitors.
Secondly, zero-based budgeting. In the current highly uncertain environment, most companies are cutting discretionary spending items. However, typical budgeting processes do not encourage managers to rethink their business models under conditions where a prolonged recession or fundamental changes in the economic situation occur. In fact, many current budgets are based on past budgets with appropriate increments to account for inflation or specific product trends. Zero-based budgeting, developed in the mid-1970s during inflationary times, aims to avoid these pitfalls.
For many companies, swiftly and efficiently allocating or withholding capital may be the only way to get through the current tough situation, thus requiring a completely new approach to the budgeting process. To help companies deal with economic turmoil, four entirely new approaches to budgeting processes are introduced. Of course, these methods are not all-encompassing, and the activities involved are not mutually exclusive, but they can help companies improve their budgeting processes.
At the end of this process, companies adopt a unified budget, but they supplement it with specific alternative financial statements and business plans based on compelling future scenarios. This method gives the company's cost structure a certain degree of flexibility, allowing them to more easily adjust the base budget when necessary through outsourcing or temporary purchase contracts. Additionally, companies identify a series of events that could cause a shift from the baseline scenario to another, such as changes in the difficulty of short-term capital raising, the bankruptcy of major customers or suppliers, or declines in specific market shares. The CFO and finance department monitor these trigger points and prepare to alert the executive team when risk levels exceed carefully set thresholds. Then, the entire executive team immediately implements pre-determined contingency plans.
This method starts the budgeting process from scratch, assuming different industries and businesses have different endpoints, such as a 30% reduction in total market size or modifications to the organization or product portfolio. Then, priorities for each expenditure item are determined based on the alignment of operating and cost expenditures with corporate strategy and estimated investment return levels.
This article emphasizes the importance of paying attention to details.