How Your KPIs Can be Tied To Your Budget To Adapt Your Company During Pandemic Times

How Your KPIs Can be Tied To Your Budget To Adapt Your Company During Pandemic Times

In these uncertain times, amidst the unprecedented conditions we faced during COVID-19, many firms face the planning of their budgets for next year. Budgeting is never easy, and this year, it is going to be incredibly challenging.

  • Most people try to avoid the subject when budgeting comes up, but it is a vital business function; everyone has to do it. If you do it properly, it is not a waste of time, even if you forecast for a period of 12-months.

It is budget season, and those responsible have to make sense of the uncertainty. If you follow these tips, it will make your life easier. Keep in mind; even financial professionals find budgeting strenuous. First of all, you have to see budgeting as an opportunity, and you have to make the most of it.

  • Budgeting, in the first instance, is a tool to drive accountability and performance. Over the course of the year, your budget provides the framework to manage the business in a manner that will maximize performance.

Management has to be specific. How will they use the budget, what are they looking for; what do they want to achieve with the budget? The enterprise should get a return on time and effort invested, after all. Many view budgeting as a combined effort and something with limited value once done. However, some management teams disagree. They engage fully and develop an ongoing performance management system based on a budget plan that they establish a long time before starting a new year. For them, the budget is its constant and detailed reference point.

Of course, the actual results will always differ from the projected outcome, and for every deviation, it is essential to figure out and understand why the differences occurred. This will inform management, who can select to keep doing what they’re doing¾when results are above expectation) or figure out how to address the problem and address the obstacles in their path (if results were below expectation).

Of course, budgeting is a complex phenomenon, and there are many approaches you can take to create a budget. It isn’t easy to figure out how to approach the task in your specific situation. In simple terms, it is all about the question: where will I find the information I require?

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To gather the information, you can either follow a top-down or a bottom-up approach. A top-down approach means that the numbers used to facilitate the budget originated from executive management. In contrast, a bottom-up approach means that information comes from employees closely connected with the relevant operational functions, including line managers and individual contributors. A second dimension to the process relates to the question: what specific information do I require? Albeit that you go bottom-up or top-down, which questions should I ask?

  • What is the expected revenue for your department for the next financial year? OR, What is your expected sales volume of individual items, at which price levels, and what customers do you expect to deliver to during the next financial year?

These two questions divide the process into ‘absolute value’ budgeting versus ‘driver-based’ budgeting. Of course, budgeting is more complicated than this.

It takes much effort to build a budget plan that works, even more so, to get everyone to buy into the program and adhere to it. The only way to achieve this is to set up crystal clear expectations and distribute responsibility and ownership of the plan to everyone involved. It has to be clear who is responsible for every department’s required achievements and specific profit centers.

One way is to align the responsibility with cost centers or slice and dice business performance targets to specific individuals. How you do that will influence your choice between a bottom-up and top-down approach. Who is responsible for the cost center? Who is responsible for the profit center? If the answer to these questions is both the CEO, then a top-down approach is required.

  • Driver-based budgeting is an abstraction of the budget’s financial values from operational metrics supplied by active drivers. For example, a sales rep will better understand expectations in his territory than anybody else. He will be able to provide a more realistic number that could he could achieve next year.
  • “I know that for product A, I will sell X units, and our prices had been constant for quite a while, so I think we can increase prices by 10%.”
  • “So I won’t achieve the sales volumes I did last year, but if I reach volumes of 90%, we can achieve the same results year over year on the back of the price increase.”

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Following his approach allows you to develop a sophisticated variance analysis when actual results fall short of expectations. If we stick to an absolute value approach, we cannot dissect and connect the shortfall with any specific income drivers. You will not be able to figure out the individual’s thought process, responsible for the figure that was not achieved. If you based your budget on the drivers, you can analyze and figure out that the volume of sales was down by ten units, and we were not able to increase the price as we intended, or we had to offer discounts. It will just provide a lot more data for your ongoing performance management.

  • In respect of budgeting, it is not the shortfall or the missed number that matters. It is the reason why that matters.

Many firms combine data analytics with budgeting. Financial analysts can summarize the firm’s sophisticated data to produce assumptions that can be used in the budget plan, based on historical data. Deducing a specific optimal mix or averaging out your data to break it down into drivers allows you to compare your answer to team members’ subjective assumptions. This improves your ability to understand variances.

  • I have to reiterate that you must endeavor to maximize your return on investment in terms of effort put into the budgeting process. You have to remain focused on how you will use the budget next year. A budget is essential for performance management, but it depends on how you use your budget plan and how you consistently follow it.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me and follow us on Facebook : FAS CPA & Consultants.

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