A 6+6 Budget Might Not Make You Popular, But It Could Save the Business (2024)

In short:

  • Asking people to rebudget is a big deal and not a move to be made lightly.
  • That’s especially true when rebudgeting downward, where you risk several illeffects.
  • Still, when your plan is useless, you have to rework it.

As an outsourced CFO, it’s sometimes my responsibility to deliver bad news — suchas tellingfunctional department leaders they need to restart the budgeting process because the companyhas wildly diverged from its roadmap.

One mechanism to do that rework is a 3+6, 6+6 or 9+3 budget exercise. The most common in mypractice is a 6+6 budget; that is, create a new budget that shows six months of actuals andsix months of forecasts. If expectations built into the budget aren’t materializing,thenit’s time to recalibrate. With 6 months of actual numbers we’re in a muchstronger positionto accurately forecast the remainder of the year.

Mid-fiscal-year budget recompilations are a burden for not just business leaders but financestaff. That’s true even when you’re rebudgeting because sales are significantlyhigher thanexpected. In those cases, you’re not greeted like an angel of doom, and needn’tworry aboutmorale and attrition. But still, you’re asking for a lot of unplanned work.

There are two ways to approach a situation where actuals and budgets diverge significantly.

Scenario 1 — tactical reforecasting: The board-approved budget remainsuntouched. The CFO tells departments, “Okay, we're investing more into our keystrategicareas to continue supporting and pushing sales. If you require an increase of, say, 5% orless, let us know what you’re doing, but you don't need approval. For more than 5%,you willneed executive approval.”

Scenario 2 — strategic rebudgeting: If there’s a large swingfrom expectedsales, say up 100% or down 30%, the CFO rebudgets because something has strategicallychanged. It’s no longer just investing more in the same areas, but an actual deep diveintowhere the highest ROIs are now coming from. When sales are positive, there’sexcitement. Onthe other hand, when sales disappoint and cash problems arise, expenses will need to be cut.This causes a lot of concern up and down the organization and can eventually lead toturnover.

Which path is best depends on whether you need to reset not just near-term targets (Scenario1) but your three-to-five year goals (Scenario 2).

OK, so we’ve established that rebudgeting is always a big deal, for several reasons. Sowhydo it?

It's sometimes abundantly clear that your budget-versus-actual roadmap has diverged so muchfrom your original plan that it doesn’t provide actionable guidance anymore.It’s uselessgoing forward, and targets need to be reset. When sales have significantly disappointed,big, strategic cuts may need to be made, and that requires deep thought. You need everybodyto buy in, including the board.

Note that I never advise rebudgeting downward unless goals really are unobtainable, andasking people to strive to make those unrealistic targets will damage morale. If yourebudget lower when you could and should have pushed harder, you risk giving everyonepermission to be mediocre.

A reach-goal encourages hard workers to say, “Okay, we're really gonna do it in thesecondhalf of the year.” That’s instead of, “Okay, phew, now we can just keepgoing at the same[unimpressive] rate.”

If you’re doing a 6+6 right, stakeholders across the organization will questionallassumptions. It’s very hands on, to the point of being invasive. Watch out forsuperficialefforts and back-channel complaints. These will need to be managed if the rebudgeting effortis to be successful.

5 Signs You Need a 6+6 Budget

A material event has occurred: The pandemic is a perfect example. I neverencourage companies to proactively slash budgets without first understanding detailedscenarios — we saw businesses cut too aggressively without supporting data, and ithurttheir long-term growth. But when variances become too large, it's time to act.

The budget was not created correctly: I’ve had to support companies inarebudgeting process when they’re off by only 5% or 10%, while others might see largervariances but are able to tweak within the existing framework. It’s something of anart toknow when to go back to the drawing board.

Ask: Will needed changes impact all departments? Wasthe initial budget not well-formed?

Your business model assumptions are flawed: This doesn’t always resultinnegative consequences. We can be pleasantly surprised that, for example, although our budgetwas built based on B2B demand, our secondary B2C channels have outperformed beyond allexpectations.

The worst case is worse: Companies go into budget exercises hoping for thebest and planning for the worst. If numbers are coming in below your worst-case scenario andyou’ve smoothed out seasonality and other temporary factors, then it’s time fora 6+6.

Cash flow liquidity has deteriorated: Maybe the budget looks, on paper, moreor less accurate. But if your cash on hand continues to decline, then you need to reevaluateall your assumptions. Continuously reviewing numbers makes you nimbler.

The 6+6 Budget Process

The finance team leads the effort to create the new budget and works intimately with thecross-functional department team heads. The CFO will take the first draft and go back andforth with the CEO until a final draft is agreed upon. This gets moved to the financecommittee for approval before being presented to the board for final sign-off. Expect lotsof Q&As and drafts flowing up and down among all stakeholders. This is definitely anall-hands-on-deck process.

More Budgeting Resources From NetSuite

A continuous close reveals crucial businessinformation in real time, empowering finance and accountingleaders to influence strategic decisions.

Budgeting vs. FinancialForecasting: Key Differences

Budget setting and financial forecasting have uniquepurposes, but they work best together. While a budget detailsexpected future results, a forecast focuses on probable futureevents to inform whether a company will hit the targets set in abudget.

5 BestPractices to Master Rolling Forecasts

Economic volatility has put the shortcomings oftraditional budgeting methodologies on full display. The smartmoney is moving toward rolling forecasts as a better way topredict business performance — and get finance in linewithsales, marketing and production.

Without a financial forecast, as a business leaderyou’ll have a hard time gaining funding and essentially benavigating without a compass.

I like the saying, “All’s well that begins well.” When I am in a CFOadvisory role and abudget review comes up, I first make sure we’re working with up-to-date numbers. Yourfinance team should close within 10 days of the end of the month, never more than 15 days.The quicker the better.

Now, I look at five buckets of data and ensure we’re up to date:

  • Previous 12-months of financials statements
  • A rolling 12-month model of projected data
  • BvA: Detailed year-to-date budget-versus-actuals with explanations forvariances
  • Weekly cash flow projections looking forward 16 weeks, including cashposition, receivables, payables and working capital requirements
  • Profitability KPIs, such as gross profit and net profit margin andproduct profitability

Only with all this information in hand do I have confidence that the numbers I’m takingintothe rebudgeting exercise are correct.

5 Rebudgeting Rules to Live By

  • No surprises! Ever.
  • Constantly stay on top of your assumptions.
  • Calculate your project ROIs to effectively allocate capital.
  • Review your goals daily.
  • Daily ask, “Where's the risk?” and “What can go wrong?”

Remember, a budget has three main functions: Prevent overspending. Set goals for employeesaround revenue generation and cost containment. And help you get additional funding if youneed it. When your budget bears little resemblance to reality, it won’t support any ofthose, and it’s time to regroup.

James Vanreusel is CEO of Vanreusel Ventures. His 20-year finance career has taken himhalfway around the world, from Belgium to the UK to Rice University Business School inTexas for an MBA in Finance & Marketing.

Vanreusel has experience as a VP with Banc Of America Securities, selling IPOs to aclient base of Wall Street investors. In 2008, he moved into a consultancy role,specializing in private equity and asset management with BlueOrchard Finance, beforemoving into the corporate world. In 2014, he relocated to San Francisco and set upVanreusel Ventures, a team of CFO consultants and financial analysts, working withfor-profit and nonprofit clients headquartered in the US with extensive internationaloperations. He is a member of CFO Leadership Council’s San Francisco Chapter.

I'm James Vanreusel, CEO of Vanreusel Ventures, bringing over 20 years of finance experience that has taken me across the globe, from Belgium to the UK, and eventually to Rice University Business School in Texas for an MBA in Finance & Marketing. My career includes a VP role with Banc Of America Securities, specializing in selling IPOs to Wall Street investors, consultancy in private equity and asset management with BlueOrchard Finance, and the establishment of Vanreusel Ventures in 2014. I lead a team of CFO consultants and financial analysts, working with both for-profit and nonprofit clients with extensive international operations. As a member of the CFO Leadership Council’s San Francisco Chapter, I've encountered various financial challenges and have become well-versed in navigating complex budgeting processes.

Now, let's delve into the concepts discussed in the provided article about the importance of rebudgeting, particularly focusing on the 6+6 budget exercise:

  1. Budget Recalibration: The article emphasizes the importance of recalibrating budgets when the company diverges significantly from its roadmap. As an outsourced CFO, I've encountered scenarios where functional department leaders are informed that a budget restart is necessary due to deviations.

  2. 6+6 Budget Exercise: The 6+6 budget exercise is highlighted as a mechanism for reworking budgets. This involves creating a new budget with six months of actuals and six months of forecasts. This approach provides a stronger foundation for accurate forecasting for the remainder of the year.

  3. Tactical Reforecasting vs. Strategic Rebudgeting: The article outlines two scenarios for handling budget deviations - tactical reforecasting and strategic rebudgeting. Tactical reforecasting involves additional investments in key strategic areas, while strategic rebudgeting is necessary when there's a significant swing in sales, requiring a deep dive into areas with the highest returns on investment.

  4. Challenges of Mid-Fiscal-Year Recompilations: The challenges associated with mid-fiscal-year budget recompilations are acknowledged. Even when rebudgeting due to positive sales, there's an acknowledgment that it involves a lot of unplanned work and can impact morale and attrition.

  5. Signs Indicating the Need for a 6+6 Budget: The article provides five signs indicating when a 6+6 budget is necessary. These signs include material events, incorrectly created budgets, flawed business model assumptions, worst-case scenarios, and deteriorating cash flow liquidity.

  6. The 6+6 Budget Process: The finance team leads the effort to create the new budget, collaborating with cross-functional department team heads. The CFO plays a key role in finalizing the budget through collaboration with the CEO, finance committee approval, and board sign-off.

  7. Rebudgeting Rules and Considerations: The article outlines rules to follow during the rebudgeting process, emphasizing the importance of staying on top of assumptions, calculating project ROIs, reviewing goals daily, and considering potential risks.

  8. The Role of Continuous Close and Financial Forecasting: Continuous close is highlighted as crucial for revealing real-time business information. Additionally, the article emphasizes the importance of financial forecasting, suggesting that budgeting and forecasting work best together to inform strategic decisions.

These concepts collectively provide a comprehensive understanding of the challenges, processes, and considerations involved in the critical task of rebudgeting.

A 6+6 Budget Might Not Make You Popular, But It Could Save the Business (2024)
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