The Hindu Business Line : Some tips for the budget season

The months of March and April are the busy season for the corporate planning and budgeting functions. Everyone is scurrying around trying to make the best possible forecast of sales turnover and profit numbers for the fiscal year just closing, while at the same time putting the finishing touches to the budget for the upcoming year — all set for a Board review. Experts are consulted in much the same way as the emperors of yore used to seek the advice of fortunetellers and soothsayers. With, one might add, as much assurance of certainty in achieving the goals. What most managers do not fully realise is the extent of uncertainty compounded that is represented by the numerous variables that can affect a company's total performance.

Take the current scene for instance: a huge list of queries pops up. Will the RBI tighten money supply further? Will the rupee appreciate more against the dollar making imported ingredients cheaper but at the same time making exports more difficult? Will the economy maintain the growth momentum of the past three years or is it as the expression goes, overheated already? Will the stocking down of the trade over the next few weeks and months in many categories, in response to credit restrictions, reduce the sales on the books, that is, despatches from the manufacturing companies even though the consumer off-take may not be so badly affected? Have the financiers burnt their fingers with delayed payments and collection difficulties and will the retail bonanza wind up quickly? Will all this make the salary earner and the self-employed more cautious, less optimistic and unwilling to spend as easily as she used to? And most important of all, what is the prognosis for the commodity markets and fossil fuels, which will affect all of us, far more than ever before because we are much more closely interlinked with the world markets? Will metals becoming dearer end the consumer durables boom?

The general reaction to this set of questions is one of anxiety. Surely, there must be someone better informed than me, says the senior manager to himself, and looks around for expert opinion. Analysts and TV channels are consulted, economists are suddenly in favour and newspaper editorials themselves join in the chorus of spreading either the uncertainty or a specific school of thought. The fact is that no one really knows for sure. The factors can probably be isolated, their inter relationships described accurately (which cause drives what result) and then some form of modelling can be attempted by the mathematically inclined. Then comes the crunch. What about the ones that only governments can decide upon and which are anybody's guess? And even for the known factors in the massive equation, few can honestly claim to be sure of the actual value of the variable — for example the rate of growth of the manufacturing share of GDP or the general level of prices in six months' time.

Given this, does one pick numbers at random for the annual budgeting exercise? Obviously not. What is most important is that the organisation must understand its own business thoroughly. It must have a stated position about what drives the consumption of its goods and services. In other words have a theory of market behaviour, derived from an understanding of individual decision making in all the relevant customer segments. Such a mental model must be shared amongst all the managers who matter in the company. Thereafter a set of assumptions must be explicitly stated and agreed upon. This might demand a series of discussions and brainstorming sessions, preferably a good three months prior to the beginning of the fiscal year. Based upon the assumptions one can draw up a reliable set of numbers. Then the real work starts. Here is what many managements do not do well enough: at periodic intervals, we have to revisit the assumptions during the course of the year and modify them and therefore one's expectations of performance, as we go along. This requires a mature and realistic top management which is willing to be flexible and stay on course throughout the year.

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