Was thinking about these things a little after reading Brad Feld’s post on budgets the other day…
When merchandise was still purchased in stores and the news was published once a day on paper pages, the budgeting exercise was straightforward. Square footage, same-store sales, circulation, market size, these sorts of things were standard, and while some year-over-year fine-tuning was required, there was not usually a reconfiguration. There was no need.
Think of these, for lack of a better term, as answer budgets – created in relatively stable circumstances, in which the business perhaps grows or shrinks a little, but systems typically do not change and there are trusted ratios and formulas to fall back upon. What’s required is straightforward answers, for planning, reporting, the lenders, cash management, and as a point of reference the next time around.
With the emergence, scale and transformations of the digitized economy – in which even mature or maturing businesses have elements of the startup, and the startups can only model their business plans after incumbents to a limited extent, the previously straightforward exercise of budgets, plans, reports and forecasts, has become more volatile.
Pricing models, market sizing and dynamics, product timing and conversion, the impact of expense categories on revenues (when) or customer growth (how), or data growth (why); the sequence, pace and timing of these and other drivers that sometimes relate and sometimes don’t; even the fundamental value unit in many cases… these are often matters of experimentation, testing, frequent revisit and adjustment, within reasoned parameters – always with a view to cash, and the balancing objective of conservation and value formation.
In contrast with the earlier exercise described, these budgets are more like question budgets. In the extreme case of a pure startup with no historical basis in financial projections, the exercise is to test hypotheses. It should be interpreted as such. The goal is to arrive at improved assumption sets next time around, which should be soon, and regularly repeated.
Most of the world these days exists somewhere between the bookends, between the question and the answer, with elements of one or the other depending on the budget category, and sometimes both in certain aspects of the business. The distinction, though, is critical, as questions should not be confused with answers (just as inputs aren’t outputs), and the different risks and degrees of variance inherent in the different types should be considered differently.
With all the moving pieces and dynamic market patterns, the future can’t possibly be predicted, but its functions can be managed, and the exercise can be valuable, interesting, and important on all levels, above and below the financial.