Budgeting is always more art than science; all that precision to the nearest pound or often pence is a misleading if comforting fiction of control. The future is always unknowable and uncontrollable but we have to have budgets to work to so we create them and hope that others: staff, suppliers, partners and customers behave the way we have predicted.
At the moment the problem is considerably more complex than usual. Predicting the future is particularly tricky and feels a bit like hubris; if the Bank of England is going for an ‘illustrative scenario’ we really must be in uncharted territory. But we still need a budget to work to, for trustees to approve and for funders to receive so how can it be done?
Here are some tips for those charged with creating budgets in our new abnormal.
- Is your current budget model useful for the world we are in? Does it let you ask ‘what if’ questions or is it all based on hard coding (direct input of numbers rather than use of formulae) and + / – x% on last year. If it is not fit for this purpose, do think about investing some time in building a better, more high level and flexible model – it will be worth it. Your new model doesn’t need to be really detailed; indeed, it is better it is not, but it will allow you to design the shape of the new budget. Try and work with formulae so you can change the variables. You can then transfer the final version into your more detailed model if you need to.
- Think carefully about your assumptions, discuss and test them as best you can. Past performance is no guarantee of future results, especially now.
- Document your assumptions clearly. Make sure everyone understands them. Some of them will turn out to have been mistaken but having them clearly stated will help you understand why your financial performance is diverging from its predicted course and will help to explain it to others, including trustees and funders.
- Your budgeting may involve some tough thinking about people’s jobs. It will help you and those considering your budget if you stay with grades/titles rather than names.
- Think about where the big financial risks are; they are likely to be in areas you don’t control such as programme and trading income rather than salary costs. Include and keep contingencies against these risks. These contingencies may save your corporate life.
- Test your budget before you finalise it. Ask someone you trust with financial skills to look at it – what have you missed? Think about applying some sensitivity analysis to quantify the risk in your budget.
- Discuss your risk appetite with your colleagues and finance trustees. How much risk are you actually willing and able to take on re-opening? If you have substantial reserves (unrestricted assets not invested in fixed assets) you will be able to take more risk than if your reserves are depleted. How willing are you to ‘bet the farm’?
- Don’t budget for breakeven because budgeting for breakeven is admitting, upfront, that you will live with a loss. Budget for a surplus, however modest. It resets people’s thinking.
- For many organisations cash flow is now, and is going to be, a real issue. Build cash flow forecasting into your model from the start, don’t do it as an afterthought and then discover your budget shows a surplus but you cannot cash flow the activity.
We hope that these ideas are helpful. And remember that all budgets are informed guesses so make sure that you can know really quickly when some of your guesses turn out to be wrong.
If you haven’t already spotted it Dawn and I are privileged to be doing a couple of bitesize ‘How to plan when planning is hard’ webinars for UK Theatre/SOLT tomorrow and Wednesday, where we’ll talk about the various issues we have been blogging about including this one. You can find all the webinars on the theatremeansbusiness website.
Susan and Dawn