Tips for approving budgets during COVID-19

Just like preparing budgets, the task of approving budgets requires greater attention in these uncertain times, writes Adrian McKelvie.

While a single case will be needed for most reporting systems, boards need to see a best case and a worst case scenario at least in summary format in uncertain times like now. 

Without this, directors lack a crucial piece of information in determining the ongoing financial health of the organisation.

• Read Adrian McKelvie’s previous article: Budgeting during a pandemic

Few organisations have a budget system capable of handling times as uncertain as the present. 

The flow on effects of COVID-19 are almost impossible to predict. Even industries that on the surface appear to be less effected than others, are  impacted. 

For example, the combined forces of a recession, the stimulus package and quantitative easing will impact on inflation, interest rates, housing and  probably procurement approaches.

Now more than ever, boards need to fully understand the key budget assumptions, have confidence in the budget process and consider their forward-looking financial reporting requirements.

A fundamental question for boards in rapidly changing environments is:

How can boards steer the organisations future with only backward-looking financials?

An annual budget process just doesn’t provide the necessary frequency or focus to provide directors what they need.

You cannot change the past, but you can influence the future.

In the current climate it is advised that boards only approve operating budgets (the profit and loss statements, balance sheet and cashflow) if they:

• have confidence in the budgeting process
• are aware of the upside and downside risks from the base case budget
• they are comfortable with the key assumptions in the budget.

Boards should allocate some time at a meeting soon after the budget meeting to discuss or investigate risk management issues identified in the worst-case scenario.

The board should ask for a paper to be prepared that outlines the cost and benefits of a rolling forecast system being introduced. At a minimum, the forecast period  should cover  two financial years.

The following questions are designed for board members to consider before approving the budget.

1.      What does the result need to be to allow the organisation to deliver on its strategic aims? This is a back calculated number not the result of the budget.

2.      How does management expect the rapidly changing economic environment to impact and what has been built into the budget document?

3.      How much stretch is in the budget being presented?

4.      What are the key assumptions in this budget?  If we assume the budget model design is solid, then assumptions drive the outcome.

5.      What are the outcomes from stress testing the key assumptions in the budget? What is the impact of moving these assumptions?  For example, 1 per cent variance in the enterprise bargaining agreement has $X impact.

6.      Which assumptions are key to maintaining an acceptable cash position?

7.      Does the  worst-case scenario give an unacceptable result? If so, the directors will need to discuss the next steps for the organisation’s risk management practices.

8.      Does the board have concerns regarding the robustness of the budget process? If so, they need to put this to the CEO.

The above does not include specific questions about any of the results but is about understanding whether or not the organisation has the core financial strength to achieve its aims.

These questions enable that by clarifying what the result needs to be then probing the presented results to ensure that the basis of calculation is reasonable.

Adrian McKelvie is an experienced chief financial officer and principal at Virtual CFO Support.

Read also: Budgeting during a pandemic

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