Persistent uncertainty makes the familiar task of budgeting both more challenging and more imperative. That always worries the CEOs and executives I advise.
“We’re bushwhacking our way through the current year. I’m struggling with how to make sense of this in a meaningful way for the next one.”
Often, it's sufficiently difficult to project financial and operating results for the current year, let alone setting objectives for the future. Further, the planning context is in constant flux. At the time of this writing, medical and public health professionals warn of the likelihood of new virus infections. We've become accustomed to the support of broader systems (like schools, transportation, government investment or relief); these may not be available to help businesses and staff going forward. Meanwhile, financial, economic, and employment worries erode consumer confidence. With few, if any, aspects of these within the executive team’s control, how do they set a meaningful budget?
Executive teams can’t rely on one picture.
No single budget will capture all of the uncertainties or possibilities any business will face through any year. Instead, CEOs must understand potential impacts on their financial and operating results under different conditions. They need multiple budgets – or a primary budget that also illustrates the critical decisions and adjustments required to adapt quickly as things change.
Your budget is (or should be) a strategic tool. It connects your resource allocation to the strategic priorities you’ve set. As CEOs navigate through the systemic impacts of the highly-interdependent and connected world, many are narrowing their focus to the things that matter most. (See my related articles here and here.) Of course, this focus also guides budgeting. Still, with so much uncertainty, executive teams can’t rely on one picture of the future.
Use varied pictures to link insights to specific budgetary actions.
Scenario thinking, visioning, exploratory learning: each of these approaches can help leaders to create pictures of the business’ future.
Look across the varied pictures: What are the key levers for your business? Then consider your budget: How might you manipulate the key levers – investing or cutting resources – and by how much? Answers to those questions help you to see beyond the uncertainty. Then, when you link strategic insights to specific budgetary actions, you also highlight the implications of your decisions on operations.
Executive teams need varied pictures of the future. They also need budgets that help them to anticipate how they might reallocate resources rapidly and effectively as things change. The greater the uncertainty in the business environment, the more clear it becomes: a single budget just won’t cut it.