Dear Aunty B,
I was recently asked by my board to do a reforecast of the budget as one of our streams of revenue was lower than expected for this time of year. So I did the reforecast and then reported current numbers against that reforecast. I also kept a column in the management reports with figures from the original budget forecast so we could clearly see how we are tracking.
However, when the board received this, one of the directors says the reforecast is simply ‘worst-case scenario’ and you should keep reporting against the original budget forecast.
What is your understanding of a reforecast budget?
Numerically Challenged,
Vic
Dear Numerically Challenged,
What is the purpose of a budget? It is to look at how you are travelling, to give you targets and to compare one period to another to see how things have changed. And for an entrepreneurial business, the journey can be up and down, particularly in such a volatile economic climate.
Your business must be able to deal with rapid change and so must your budgeting systems. So it makes sense that you must update your budget, ie. reforecast to predict where the business is likely to end up.
If you change strategy or your business circumstances change and you don’t update, then the variances become meaningless and the information useless. For example, you need to change your strategy mid-year. You then predict that revenue could fall for a few months before picking up substantially. If you don’t reforecast you will find the budget very out of whack.
On the other hand the last thing you want to do is keep reforecasting, as it is confusing for a board and can disguise a decline. So I think what you have done is ideal. Report against your reforecast but keep a column of the signed off budget forecast as a reminder.
And don’t forget you can also do several reforecasts – for best case and worst-case scenarios.
Good luck!
Your Aunty B
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