Inciteful

No!  But it is now just one of a number of forecasting tools to measure the performance of your business.

These days, a profit and loss budget is really a benchmarking tool to measure the actual financial performance of your business over a period of time, usually month by month over a financial year.  This answers the question: “how have we performed from a profitability perspective over the year compared to what we expected at the beginning of the year?”

A traditional budget may also be a tool for special purposes such as a sales budget to measure the results of the sales team over a period.  This budget may be a “performance” based budget with sales targets that are higher than in the more realistic profit and loss budget.     

Modern forecasting and performance measurement includes a lot more than traditional budgets.  For starters, these tools focus on Key Performance Indicators (KPI’s) or “business drivers” in all areas of the business not just financial.  This may include KPI’s for: units of sales; products; margins; interest rates; manufacturing and operations; staff and resources; sales and customers; and product development and innovation.  Each business is different and needs to choose those KPI’s that best reflect the performance of that business.  Once chosen, these KPI’s need to be quantified as a forecast or projected result and then actual results measured against the KPI on a regular basis.  KPI’s may be developed from past performance, desired or expected performance, or reference to industry, competition, market or economic data.

The other thing about modern forecasting or “projections” is that they are not static but change much more frequently than in “the old days” as expectations and actual results change.  Pretty much like all things these days!  The times of measuring performance over a financial year based on criteria set at the beginning of the year are over, except in a benchmarking sense as mentioned above.  For example, you probably want to know “what is now going to be the profitability of the business over the next month/ quarter/ year” so we would now prepare a profit and loss “projection” as opposed to a “budget” for the period in question with a focus on the financial KPI’s as chosen above.  This projection would be updated as appropriate based on actual performance and expectations and extended out for a further period of a month/ quarter/ year.  This example would apply to all other KPI’s for the business.

These performance measurements can be incorporated in a regular Business Review or “Management Dashboard” report for analysis by management and other interested parties so that appropriate and timely decisions can be made to grow the business.

So, the budget is not dead just different - “long live the budget!”