Flexibility is the key to planning in a recession

Budgeting during a recession is a hazardous and frustrating process. Kate Sayer, a partner at charity finance consultancy and auditors Sayer Vincent, says a vibrant strategy that focuses on the needs of beneficiaries is vital

Kate Sayer
Kate Sayer

The sector may well be used to planning and budgeting in reasonably stable environments, but it has recently been experiencing extreme volatility and faces an uncertain future in terms of income and funding. So will the old and familiar budget tools do the job? And what are the characteristics of organisations that succeed and thrive in uncertain times?

Budgets are unlikely to be the right tools in a period of uncertainty. For a start, the budget preparation process takes too long. Most organisations start by asking managers to look at budgets in the autumn, and they might take six months or longer to finalise and go through several iterations.

With such a long lead time, it is inevitable that the budget is out of date as soon as it is agreed. Volatile markets and a period of uncertainty exacerbate the problem.

The organisations that succeed in uncertain times are those that adapt quickly to the changing external environment. In order to do this, organisations need to look at how they carry out planning and forecasting, and how they allocate resources.

One of the purposes of budgeting is to decide where resources will be allocated, which activities will be prioritised and how much will be spent on them. Changes in the external environment might mean that organisations should review whether the activities they prioritised should be changed - they need to review their strategic priorities regularly.

Organisations also need to think about whether the activity is resulting in the outcomes they expected. When they draw up plans and budgets, they make assumptions about cause-and-effect relationships, such as "if we put a parenting programme into that neighbourhood, that will reduce the harm to children". In fact, until evidence is gathered, we do not know whether that particular intervention will be successful. Other approaches will be more or less successful and more or less expensive. So our strategies and plans are really a set of hypotheses, and when we look at the performance of activities we should be open to all feedback in order to learn.

Financially, we need to change our approach to allocating resources. Doing this once a year is too inflexible and commits us too far in advance. It also encourages the wrong mindset among managers and staff. They consider an allocated budget to be 'their' money and will spend it even if the indicators are showing that the activity is not necessarily the best way to achieve the desired outcomes or that strategic priorities need to change in the context of the external environment. We can see this at the end of every financial year - expenditure is always higher in the last quarter as managers try to use up unspent budgets.

This behaviour is understandable - you might suffer a cut in the budget the following year if you seem not to need it all - but it encourages waste. A better approach to allocating resources in uncertain times is to review regularly the resources needed, consider the risks and release resources as they are needed.

To make regular resource allocation decisions, you need the right information. You need forward-looking financial information based on up-to-date actuals and best estimates of future incoming and outgoing resources. You need to consider the risks attached to those forecasts. Some elements of your forecast will be fairly certain, but others will carry a higher degree of risk. You must factor the risks into the appraisal of the resources likely to be available.

You should then factor in the use of reserves. Although you do not want to run down reserves, you might need to 'borrow' from them in the short term. If you have already dipped into reserves and need to replenish them, you would not want to commit to further spending until there is greater certainty for future income.

So consider how quickly your organisation can adapt to a changing external environment. If you have a rigid planning and budgeting process, then managers are likely to view their goal as sticking to the plan.

If you have a vibrant strategy that focuses on the needs of your beneficiaries, then managers will be coming back to the senior management team and trustees to talk about the innovative ideas they have for meeting today's needs from the resources they have available.

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