May 17, 2011
Up one day, down the next. The volatile economy means many firms are no longer able to rely on a static budget. Almost 37% of respondents to a recent online survey published in a recent issue of The ZweigLetter, ZweigWhite’s weekly management publication, indicated yearly budgets become obsolete four to six months into the year.
“Using a static budget that gets put together once a year is not optimal,” said ZweigWhite Valuation Consultant Tracey Jeffers. “Staying abreast of changing conditions within the firm and the outside influences, and reflecting those in rolling forecasts, provides for much greater financial intelligence and allows for better decision making.”
Almost 6% of respondents to the survey reported their financial planning assumptions become obsolete before the year even begins. Another 10.5% indicated their financial plans are irrelevant seven to nine months into the year, and 10.5% said their assumptions are valid 10 to 12 months into the year. The remaining 36.8% indicated their budgeting never becomes obsolete and that their financial planning assumptions are valid the entire year.
Draper Aden Associates, Inc., a consulting engineering firm in Blacksburg, VA, uses a rolling forecast, said Vice President and CFO Theresa Turner.
Turner says it is impossible to predict with precision how target markets or the economy will fare for a 12-month period. Therefore, to be fiscally responsible, an organization should benchmark themselves to the industry, their budgets, and what the economy’s current status is.
“We do comparisons to our budgets and then forecast the rest of the year based on those factors. There are many factors that cannot be predicted during the budget process, so forecasting based on current status is a must,” she said. “There may be unanticipated issues with major projects, such as lost fees, carrying work in process, or even cash flow issues that delay payment. These are factors that can have significant impact on the current status of financial performance that could not be predicted during the initial budgeting process.”