We have done our budgets for years looking at past trend lines adding in seasonality and hoping variability is similar to the past. When results are good we as managers have a tendency to push aside bottom up budgets. The question every manager needs to ask about their business is. "am I seeing a structural change in my marketplace." A structural change is defined as a long-term widespread change of the fundamental structure.
Does this describe your industry?
For those of you brave enough to tackle this or those of you are struggling right now to get a better handle on this let me provide a possible structure. This will help you streamline the budget setting process by validating the underlying assumptions in the budget, developing strategies for growth, and setting objectives to close the gap between your budgeted trend line and the forecasted trend line. Some of you might be asking yourself what does this have to do with innovation. If you have read my blog you know that I believe innovation happens in the gaps. Those gaps exist between what is actually happening and the expectation of what should happen and innovation is how you get back to the high growth.
Here's an approach that should help. For more information go to my web site.
Step 1 Determine Budget Drivers and Sensitivity
Identify and test sensitivity on each budget driver. Budget drivers are a set of key factors that drive the business. Start with the P&L. Identify which items have the biggest impact on the P&L.
Step 2 Test Assumptions
Determine if the drivers you chose are leverageable by testing them with customers and further modeling. Will it be something that we will ask respondents directly, segment later during the database work, or derive through some other means. This step requires some research. It doesn't mean you have to spend a lot of money but it does require you to go out and talk to customers. When you are testing expense assumptions it will require you to talk to internal people.
Step 3 Map Learnings
Analyze data and develop trend lines. Compare against the budget trend lines. You will need a good financial modeller to rebuild your budget models with the new forecast. After you are done try graphing the results and the gaps will be obvious.
Step 4 Action Planning (The Innovation Gap)
Determine which assumptions we want to work on. This is a prioritization exercise as much as it is a action planning exercise. I'll post a prioritization method that works for my clients in another article. By now you understand the sensitivity of the assumptions and the individual impact they have on the P&L. Remember some of the assumptions are dependent on others. For example, service revenue may be dependent on renewal and new customers. The underlying assumptions that need to be worked on then would be retention and new customer acquisition.
Step 5 Objective Setting
Each strategy is broken down into a set of activities that will be used to set specific objectives throughout the organization to close the gap between the trend lines.
Step 6 Measurement / Strategic Architecture
The final step is to put in place a measurement tool to ensure the gap is closing.
Good luck and remember you can always email us for more information on how we can help your company or check our web site.
Rob Goldberg 2009
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