How do you plan for the unexpected in your budget?

Budget and Forecasting are crutches to navigate uncertainty. In a modern setup, it's inevitable to budget and forecast to get acceptance for business spend. If unexpected hits you, 1) Relook at other lines from zero base and evaluate 2) Repriortise using first principles on cost and find opportunities. 3) Some of the planned spending also might not be needed after you do 1 and 2 and give leeway.

Understanding fixed and variable costs is a fundamental step in budgeting, yet an often-overlooked aspect is the incorporation of a 'risk buffer.' This buffer accounts for unexpected events that neither fall into fixed nor variable categories, like market disruptions or emergent technologies impacting business operations. Allocating resources towards this buffer not only safeguards against unforeseen financial strains but also allows for agile responses to opportunities that may arise unexpectedly. This proactive approach to budgeting, viewing risks as potential avenues for innovation and growth, can be a game-changer in dynamic business environments.

Planning for the unexpected in your budget requires a strategic approach. Anticipate potential risks, allocate contingency funds, and regularly review and adjust your financial plan. By doing so, you can navigate unforeseen circumstances with confidence and maintain financial stability.

Separate fixed and variable costs in your budgeting to prepare for the unexpected. Fixed costs, like rent and salaries, remain consistent. Variable costs, such as materials and marketing, fluctuate with demand. This separation reveals your budget flexibility and break-even point, aiding in adapting to unforeseen changes.

Most departments have what I call is the churn activity. These are expenses where you don't know what exactly they will be, but historically they happen and are predictable enough to put into the budget. Use the historical trends to establish what to include.

Create a contingency fund to safeguard against unforeseen financial challenges. Set aside a reserve of funds to cover unexpected expenses like repairs, legal fees, or staffing needs. This fund can also serve as a way to seize opportunities that demand upfront investments, like expanding your offerings or acquiring competitors. Aim for a contingency fund equivalent to three to six months of fixed costs to ensure financial stability and flexibility.

It's always a good idea to squirrel away a management reserve that is not with the CEO (so people think he has money to go ask for) and not in the hands of the CFO. It should be with the budgeteer, who reports to the CFO. That way the reserve will be available when both the requester, CEO and CFO agree that the unexpected is worthy to be funded. Otherwise, the requester needs approval by both the CEO and CFO to overrun the budget.

There are several methodologies in the literature to prepare. But I highly recommend cashflow at risk. It focuses on the lungs of the business, cash. But the best way is to develop efficient risk management.

Utilise scenario analysis to prepare for various budget scenarios. Develop different budget versions based on diverse assumptions and outcomes, such as best-case, worst-case, and most-likely scenarios. This approach enables you to gauge how your budget would adapt to different conditions and plan accordingly. By identifying key drivers and risks that impact your budget, you can proactively monitor and address potential challenges as they arise.

Remember: scenarios must work in real life, not just in Excel. It's easy to build out different cost structures depending on your revenue growth. It's much more difficult to change your cost structure once you don't execute according to the best case plan. Take the flexibility of your expense items into account and build decision moments into your scenario planning. When is the latest timing to adjust your expenses to ensure you still achieve the base case, if the best case is not realizing?

Understand your activity throughout the year and how much control or change you can effect when. Knowing your cash flows gives you the opportunity to regularly measure your position and your ability to pivot or mitigate possible unexpected expenses. Most budgets are laden with fixed costs that are not so easily reduced once you have progressed beyond Q1. Know where you are throughout the whole year and be mindful of what is out of your control as your possible contingencies.

Regularly review and update your budget to effectively prepare for unexpected situations. Recognise that budgets are dynamic and require ongoing attention. Monitor your actual performance against projections and identify any discrepancies. Revise your budget to realign your spending and income with your goals and priorities, ensuring flexibility and adaptability in response to changing circumstances.

One of the best practices is to ensure that you have a contingency built into the budget. This is usually some percentage of total revenue. This is your buffer if you do not achieve your revenue targets, or if some of your spending targets are exceeded because of inflationary pressures or other unexpected expense fluctuations.

I don't believe in changing the budget. Have it fixed. the only adjustments should be for lower indicated final forecasts which will be used to lower the departmental budgets to fund unfunded wish projects that will add significant long-term value to the organization.

Na minha experiencia como executivo, posso afirmar não há liderança sem comunicação. Esta etapa é fundamental para o sucesso de qualquer atividade com a equipe. Entretanto, é necessário estabelecer alguns compromissos que visam respeitar os valores da organização, objetivos e a capacidade de captar subsidio da equipe. Importante, lembrar que a comunicação é uma via de duas mãos, onde assumimos papel de emissor em alguns momentos, mas precisamos estar muito atentos ao momento de ser um bom receptor de conteúdo. Sempre dando confiança a equipe de que o ambiente de confiança está preservado e que o trabalho colaborativo gera resultados preciosos. Precisamos fazer com que acreditem no que estão propondo e estejam comprometidos com a execução.

I agree. Communication is key between operations doing the spend, accounting recording the spend, and FP&A reporting on the spend and forecasting future performance vs budget. It is very important for these three areas to not live in their own silos but rather work hand in hand to improve business performance and meet budgetary goals together.

Por trás de cada experiencia, há muito aprendizado, seja nos acertos ou nos fracassos, o racionalismo pode ser fundamental para examinar vitorias e derrotas, fazendo bons pontos de conexão e projetando ajustes. Alguns ajustes não podem ser postergados, precisam de aplicação rápida, outros podem exigir mais informações, melhor planejamento e uma aplicação mais organizadas. Memórias, assim como dados, são relevantes e não podem ser desperdiçados.

There's a lot to be said about financing a company in dealing with unexpected budgeting expenses. Those who are highly leveraged or reliant on venture, etc., funding are often placed in awkward, difficult situations. Cash-based businesses may be slower out of the gate, but are often much faster down the road when the unexpected arises.

É muito comum para cada projeto haver objetivos claros propostos, precisamos saber adicionar soluções aderentes e surpreender positivamente em cada projeto. O segredo está em atender os objetivos, de forma objetiva e com alguma margem de segurança, poder antecipar resultados e entregas.

i think it is logic some time to find unexpected in budget like new project , urgent big Machine , but if you do efforts in your budget and this unexpected issue out of your expectation , i think it is logic but this unexpected issue in budget if it is come from negligence in work actually you should attention and do more efforts when preparing budget , secondly if you using flexible budget not fixed budget i think from my experience you can adjusted and justify and continuous .