I hate budgets. They often feel like control and accountability, riddled with guilt and shame. It’s the same as a diet…
I’m obviously wrong though. Accountants bang on about them all the time (as do nutritionists on diets…) so there’s got to be something in them. Right? Yes. I’ve been able to hate them less by flipping the language.
They’re not about controlling me, they’re instead giving me permission to spend. They’re a planning process helping me to think about my business (and home spending) from the ground up. They’re a tool to let me know if I’m on track, and to help me unpack the assumptions I’m making about my business. They’re a yardstick to tell me when my assumptions are wrong.
They’re still two-dimensional. We go to Red, and my assumptions are out the window. We hire a new employee and sales go up so my Budget needs rework. Our costs go up, profit tanks and the Budget is ‘wrong’.
In comes Scenario Planning. If I hate Budgeting, I love Scenario Planning.
Scenario Planning is to Budgeting is what a 3D movie (remember those?!) is to a regular movie. There’s more depth, layering and reality.
Let’s say you want to compare doubling your turnover, against downsizing. It’s working through what the adjusted turnover means all areas of your business. From your supplier margins (will they discount if you buy more?), to staffing levels (across sales, delivery and support staff), overheads (if you downsize how much can you save), debtors, plant and equipment and tax payments.
Or, how does the Red Traffic Light setting compare to Orange. What would Green look like? What do fewer people working from the office mean for your productivity? What does reduced foot traffic mean for your sales? Scenarios, and better questions, can give the insight you need to plan with comfort, in spite of the uncertainty.
It’s looking at all of your business, from your Profit & Loss, to Cashflow, to Balance Sheet. Everything, from top to bottom.
From there you get a three-dimensional picture of each option. Not just a two-dimensional budget you work to with assumptions that only hold true in one situation.
So, what are you planning for? What could you be planning for? What scenarios should you have on the table?
We go into more on Budgeting and Scenario Planning in Level 2 of Convex Business School. Check it out here.
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