Budgeting Season Is Here – What Most Forecasts Miss Before They Even Start

It's October. Budget season – and few people are looking forward to it. For many, budgeting is a necessary evil: a back-office exercise, something to get approved and move on from.  So it gets done the quickest way possible. Someone opens last year's P&L, applies a growth rate, and spreads it across twelve months. The spreadsheet balances. The board approves it. By March, the plan and reality have quietly parted ways. Nobody noticed exactly when, because the leadership team never sat down together to think the business through in numbers.

Budget and Business Don't Speak the Same Language

A budget is what the company intends to achieve. A forecast is what is likely to happen. Both are needed, but neither works unless it is written in the language of your business.

Often the budget is put together by finance alone. Not by choice, but because the company has never budgeted together, and nobody quite knows how to start that conversation, let alone lead it. The result is a budget that speaks in accounts and Excel rows, and a business that speaks in customers, hires and product launches. By the end of Q1, a separate forecast appears alongside it, already more than 10 % apart in revenue.

The consequences scale quickly. With a 20 % EBITDA margin and costs that can't be cut overnight, a 15 % revenue shortfall can wipe out three quarters of the year's profit. For a company already burning cash, the gap comes straight out of the runway – and in the end, out of investors' pockets.

What We've Seen Work

1. Start with how the business makes money

Before a single number goes into Excel, break the business down into its mechanics. What has to happen for a euro of revenue to arrive? What does it cost to deliver, and what erodes the margin?

2. Find what drives it

Growth may be driven by product launches, by the number of salespeople and how fast they ramp up – or by supply. In expert services firms, as well as in hyper-growth startups, the constraint is often how many skilled people you can hire. Same principle, different atoms, and a different budgeting language.

3. Put it on a rhythm

A forecast compared with actuals once a year is a document. Compared and discussed every month, it becomes a management tool.

From Vision to Budget

In growth companies, the budget starts from ambition. The trouble is when it stays there, describing the destination but not the way.

What changes it is one question: how do we get there, and how long will it take? The answer gives the bottom-up view. The vision stays on a two-to-five-year horizon; the budget becomes the first twelve months toward it.

And if last year's budget missed badly, it doesn't have to be thrown away. Call it what it was – a vision – and correct the timeline. The destination stays; only the arrival date moves.

The Gap Is Where Management Happens

Budget and forecast will differ. What matters is how clearly management can understand and explain why.

If the budget was a growth rate, the answer is vague: sales came in weaker than planned. If it was built from drivers, the answer is specific: the second salesperson started in May instead of February.

And a specific answer opens a better question. Why May? Did recruitment start too late, or were there no suitable candidates? Two questions in, the conversation is no longer about the budget. It is about the real bottleneck behind growth – and now there is a decision to make.

Rise Above the Monthly Pulse

Monthly follow-up keeps the business on track. But at least once a year, the leadership team needs to step above the day-to-day and look at the numbers the way an outside observer would.

Three questions are enough to start. Where is this year actually landing, and what can still be done before it closes? Where do we want to be in three years? And what does next year need to be to get there – compared with what it can realistically be?

Done this way, budgeting stops being a back-office exercise. It becomes the moment the leadership team thinks the business through together, and that logic starts reaching every level of the organisation. It often helps to have someone in the room whose job is to facilitate the conversation rather than defend a number.

The budget is where you want to be. The forecast is where you're heading. Management is the distance between them.

 If you are looking at next year's budget for your company, or one you work with, one question is worth asking:  Can you see how the company makes money – and where the bottleneck to its growth is?

Written:
Arno Paula
Interim CFO