Budgeting is full of unpredictability. No one can see the future, which is why financial teams look to past performance data when setting spending limits. This process can be effective under the right circumstances, but it doesn’t address a glaring issue – past data doesn’t account for new challenges.
Growing companies will undoubtedly face new opportunities and obstacles that will warrant different expenses than in previous years. Looking at past data alone isn’t enough to help with budget planning.
Adding scenario planning to your budgeting and forecasting can turn a reactive budgeting model into a forward-thinking one.
The Advantages of “What If” Models for Budgeting
Scenario planning, or “What If” models for budgeting, help to create dynamic budgets that evolve based on new data or opportunities. Rather than focusing solely on previous scenarios and guesswork, the “What If” approach builds out multiple potential budget plans and reviews the effects of any changes. The goal is to allow business leaders to react to budget needs in the moment rather than after the fact.
Situations like a global pandemic demonstrate a need for more fluid budgeting processes. The effects of the COVID-19 pandemic left many organizations unprepared for the changes that were forced upon them in terms of how they operate and how they market to their audience. Even well-established companies can’t always predict new threats, opportunities and other situations that may impact their annual budget.
By adopting a “What If” approach to budgeting, companies stand a better chance of being prepared with the funds they need in all the right places.
What Can “What If” Models Reveal to Financial Decision Makers?
As they work through “What If” scenarios, financial teams can gain better insights into their business performance. These include, but are not limited to:
1. Existing vs. Needed Resources
Part of “What If” planning includes the need to identify current resources and what resources may be needed in specific scenarios. Bringing in new resources can drastically impact budgets, and if funds are not available, it could prevent the organization from achieving strategic goals.
2. Market Volatility
Markets and partners that have demonstrated volatility in the past can influence budget decisions. Creating “What If” scenarios around specifics entities can reveal exactly how spending may be impacted.
3. Most Likely Scenarios
Experts warn against giving too much consideration to unlikely scenarios. Instead, focus on qualitative approaches first to see how trends might overlap. If scenarios are too unpredictable, planning with any level of certainty would be meaningless.
How ERP Supports Hypothetical Budget-Planning Scenarios
Any type of budgeting and forecasting relies on guesswork and data, and no amount of planning can future-proof the process entirely. However, when you can review multiple likely scenarios and the avenues they create for your finances, you can make better financial decisions in the moment that aren’t strictly limited to the original budget.
ERP reporting supports budgeting and forecasting by taking a holistic data-driven approach to “What If” scenarios. As ERP software analyzes data in real time, companies can make more impactful, immediate decisions that allow for fluid spending.