If the coronavirus outbreak disrupts your budget

Consider this scenario:

November 2019. After months and months of late nights and long weekends, an exhausted finance function can finally take a deep breath. Numbers have been flying up and down the organisation since the summer. Internal gaming has once again poisoned the atmosphere, despite all intentions about a much better budget process than last year. But finally, the budget proposal is finished, ready for board review and approval.

December 2019. The board members are not happy. They want better outcomes. Higher sales and lower costs. Back to finance for further revisions. The numbers are revised and adjusted. Five per cent here, 10% there. Finally, the board is satisfied. The administration is thanked for another solid and professional budget job and for the way next year has been planned with accounting precision — which marketing campaigns, which investment projects, what travel cost level, how much to spend on consultants, and so much more. All distributed across the next 12 months. Ready to go.

January 2020. There are rumours about a virus outbreak in China. A small initial concern is soon replaced with a nagging, uncomfortable déjà vu feeling.

March 2020. The world is in chaos. Millions of people are quarantined, regions are closed off, hospitals are overcrowded, flights and conferences are cancelled, and the number of affected people is accelerating dramatically. Stocks and oil prices are collapsing.

And the 2020 budget? For most companies, it is completely dead. Outdated and meaningless.

The 2020 budget problem is, of course, a small one compared to the massive potential humanitarian and economic consequences of the coronavirus.

Still, this is not the first time the world has been hit by a massive and global crisis, and it won’t be the last. While it might not happen every year, it does occur on a smaller scale, all the time. The business world is full of surprises. Competitors go bankrupt (or pop up), oil prices crash (or soar), disruptive new technologies appear, exchange rates fluctuate, and there is more on a long list of things that we can’t control. The only thing we know about our budget assumptions for next year is that most of them will be wrong.

In such an unpredictable world, we shouldn’t expect budgeting to produce predictable results. It assumes that we can sit down in the autumn and decide everything for next year — what to earn and what to spend and invest, all laid out at the lowest detail level. We believe this gives us control. It gives us nothing but an illusion of control.

Is there anything finance can do about this, right here and right now, as the coronavirus crisis is roaring around us? Yes, there is.

First, forget the 2020 budget. Don’t even try to revise it. A new one will be outdated just as quickly as the old one. But there is hope!

Second, remember that the budget has three different and sometimes conflicting purposes — target setting, forecasting, and resource allocation. (See my other FM article on event-driven business rhythm.) These are outlined in the Beyond Budgeting principles. They should all be handled in three different processes and be organised on the rhythm best suited for each one. This will seldom be a fiscal-year cycle. Here’s what you can do now:

Target setting. Finding meaningful 2020 financial targets is for many now almost impossible. How could we know? Instead, tell the people in the organisation to do as well as they can. Performance will be evaluated using all facts on the table, both tailwind and headwind. Revise targets as you are able and ensure they have meaningful time horizons. End of December deadlines should be the exception, not the rule. And as always, relative performance in comparison with peers in the industry is a much better yardstick than hitting a fixed number.

Forecasting. Update your forecasts as needed. Look as far ahead as required or possible. Right now, that will probably be much shorter than what you are used to. Remember that forecasting has one purpose only: decision-making. Frequency and time horizons should therefore be driven by the decisions that need to be made. If everything is foggy, consider dropping forecasting all together, or limit yourself to a few high-level scenarios or alternatives.

One additional piece of advice on forecasts: For months to come, they will bring more bad news than good news. But if you can act on the information, these are not bad forecasts. They are good forecasts with bad news. Don’t mix up the two. If you are on the receiving end of a good forecast with bad news, your response is critical. If you beat up those presenting, such forecasts will stop coming, or they will come too late, making you unable to respond. People have learned what happens if they bring bad news upstairs. Your response should therefore always be encouraging: “Great job! Now we know how to respond.”

Resource allocation. Make decisions and allocate your resources as late as possible. The less pre-allocation, the less need for re-allocation. Whenever there are natural decision points, like approving new projects or activities, then make these decisions when required, meaning as late as possible. This gives you the best possible information, not just about the quality of the proposal but also about your capacity to fund it. This information is found in your latest dynamic cash forecast. If there is a need for significantly reducing fixed costs, setting overall frames with full autonomy for the organisation to optimise within is a much better alternative than a detailed cost budget.

Continuously monitor actual developments through trend reporting, control charts, or other reporting methods to help you understand what has been and might be happening.

Closing thoughts

What is proposed here might seem radical, and it is understandable if you are sceptical. You may feel this is scary. But these are scary times. You feel as if you will lose control, but maybe you already lost it or never had it in the first place. You think that this will pass and things will come back to normal. Maybe they will, but for a very short time only.

If adopting a more agile way of business planning doesn’t work, what is the real risk? You can go back and make an updated 2020 budget any day you want. There is no need to delete your budget instruction pages, and even if you did, nobody will have forgotten. Compare this minimal downside risk with the huge upside potential when (and not if) it works. I promise, this is a pretty compelling risk picture!

The current coronavirus outbreak will come to an end. When that happens, we will do our best to both prepare for and avoid the next one. And there will be other threats. There are more than pandemics on the global risk radar.

We have, however, a choice when it comes to how we lead and manage in our organisations. What if you grab this unique opportunity for something more than just a one-off response to a challenging 2020 situation? What if you use these turbulent times not just to survive 2020 but to fundamentally rethink old ways and beliefs? What if you use this opportunity to make your organisation radically more prepared and resilient against whatever lies ahead? The timing is perfect. Old thinking and processes are undressed as maybe never before.

For more news and reporting on the coronavirus and how management accountants can handle challenges related to the outbreak, visit FM’s coronavirus resources page.

— Bjarte Bogsnes is active in the Beyond Budgeting movement and heads the implementation of Beyond Budgeting at Equinor (formerly Statoil), Scandinavia’s largest company. He is the author of Implementing Beyond Budgeting: Unlocking the Performance Potential. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.