Budgeting and Forecasting as Financial Year End Approaches

Many businesses have adopted 31 March as their year end and will be looking ahead now to the coming financial year. It is budget time!

Of course in many larger organisations accountants may have been at it since December but either way the time has come for colours to be nailed to masts and budgets and forecasts to be submitted for approval by the great and good of the organisation.

Understanding Budget Preparation

The practicalities underlying the preparation of a budget or forecast should be well known to the accountant but what is often neglected in the drive to make a pretty spreadsheet are the non-financial factors.

There are generally two questions:

Are the assumptions on which we have based our numbers valid? They were in December when we started -- are they still?
Will the final forecast/budget be acceptable politically by the board and, ultimately in the case of listed companies, by the shareholders?

Impact of External Factors on Budgeting

Of course some industries have always lived in volatile times. Any business to do with fashion and popular trends knows how the whims of the buying public can change almost overnight. Industries such as mining and construction can see volatility in cost pricing and income returns which often have no bearing on their organisation's performance but are shaped by outside forces beyond their control.

In a stable world, where markets tend to be fairly predictable budgeting and forecasting is relatively straightforward. In this case the past is likely to be a guide to the future. Is this now true? Are there stable markets anymore?

Suppose, for example, you are the accountant for a Canadian company selling product into the USA? Your budget may well be meaningless in the light of policy adopted by the President of the USA Donald J Trump. His tariff policy, flexible and unpredictable, is not only causing concern among businesses and economists it is causing accountants to have late nights working on spreadsheet adjustments.

These kind of global upheavals don't only affect big business or large organisations. The effect cascades down to smaller local businesses through supply chains and buying organisations.

How have external factors impacted your financial planning? Share your experience in the comments below!

If a business is say a Tier 2 or 3 supplier (a supplier to other suppliers) or a contractor to a major business the effect of global events will sooner or later cascade down to that level in some way. Take a manufacturer of cans for food processing or carbonated drinks for example. Their cans are made from steel or aluminium. Changes to the price of those products can greatly influence materials costs -- can these be passed on? Margins are tight in some industries so maybe not. If tariffs are imposed, for example, costs may rise quite considerably for some products.

It could be therefore that supply chains have to be adjusted so new buying patterns established. Management may decide to carry increased inventory or buffer stocks to cope with potential swings in availability of key items. This will affect cash flows.

Global warming is also influencing weather patterns. This is affecting global food prices for some products as growers either find increased difficulty in growing crops due to adverse weather conditions or have to spend additional sums on irrigation or fertilisers etc.

Ethical Considerations in Budgeting

There also remains some decision making about the tone to be adopted in any budgets or forecasts. Are we being optimistic or pessimistic? Where there are ambiguities in accounting, for example have we taken a favourable view or a gloomy approach and been a little big negative?

Finally once the budgets and forecasts have been supposedly finished and presented to the board will they like them? Will the CEO say that the story isn't good enough, that we can't tell the shareholders that things are worse than we thought.

This presents a nice ethical dilemma -- does the poor accountant create a fiction to please the CEO or stick boldly to their version of the truth? It's only a budget or a forecast -- it's out of date the minute its finished so, in reality, it is never a hill worth dying on.

Any budget or forecast is, at best, a guideline so if it looks reasonable -- it probably is.

Check our all of our verifiable cpd courses on budgeting and forecasting here!