As a management accountant or finance professional a core skill is forecasting and budgeting. My mini-series offers tips and tricks to help you improve your skills in this area.
We’re on step 3 here, if you want a recap of the other steps, click here.
Today I want to talk about the importance of assumptions, and your flexibility of working with them.
The importance of assumptions
Budgeting is a process that creates a financial plan. This plan is based on future events that are not 100% certain.
So this makes budgeting ambiguous. Over the years I’ve seen many approaches to dealing with this ambiguity, from rolling forward last years results, to bottom up forecasting from numerous business partners, but the successful attempts have always been based on clear assumptions.
And I mean super-clear.
E.g. I am assuming that we will have an identical mix of customer types next year, with 10% growth.
As long as you’ve made this clear then people can get behind the assumptions, or not, but at least they will understand what they are looking at…
Get your assumptions signed off
Are you the ultimate business owner of the profit or cost you are budget in for? As a finance professional, I doubt it. Therefore, you need to make sure whoever is on the hook for the budget delivery has agreed to the final figures.
Organise a sign off meeting with the ultimate owner, plus your FD, and present your super-clear assumptions. Agree the budget in the meeting, and decide on any follow up actions.
How to test that your assumptions are good enough
This is quite easy.
You’ve been in budget sign off meetings and felt that sinking feeling as your FD rips apart your 3 months of work, right? He/she does this by asking questions like:
Why is income up 200%? Why has your rental is Spanish properties gone from £100k to £0?
The best way to test assumptions in a budget is to print off the P&L, then leave it overnight. Come back the next day with fresh eyes and imagine you wanted to pick holes in the numbers.
What questions would you ask? Do you like the answers? If not then I suggest you have another look at what you’ve assumed.
Your budget is only as good as the assumptions you make. Make them clear, get them signed off, and test them for robustness.