A 6+6 Budget Might Not Make You Popular, But It Could Save the Business (2024)

In short:

• Asking people to rebudget is a big deal and not a move to be made lightly.
• That’s especially true when rebudgeting downward, where you risk several illeffects.
• Still, when your plan is useless, you have to rework it.

As an outsourced CFO, it’s sometimes my responsibility to deliver bad news — suchas tellingfunctional department leaders they need to restart the budgeting process because the companyhas wildly diverged from its roadmap.

One mechanism to do that rework is a 3+6, 6+6 or 9+3 budget exercise. The most common in mypractice is a 6+6 budget; that is, create a new budget that shows six months of actuals andsix months of forecasts. If expectations built into the budget aren’t materializing,thenit’s time to recalibrate. With 6 months of actual numbers we’re in a muchstronger positionto accurately forecast the remainder of the year.

Mid-fiscal-year budget recompilations are a burden for not just business leaders but financestaff. That’s true even when you’re rebudgeting because sales are significantlyhigher thanexpected. In those cases, you’re not greeted like an angel of doom, and needn’tworry aboutmorale and attrition. But still, you’re asking for a lot of unplanned work.

There are two ways to approach a situation where actuals and budgets diverge significantly.

Scenario 1 — tactical reforecasting: The board-approved budget remainsuntouched. The CFO tells departments, “Okay, we're investing more into our keystrategicareas to continue supporting and pushing sales. If you require an increase of, say, 5% orless, let us know what you’re doing, but you don't need approval. For more than 5%,you willneed executive approval.”

Scenario 2 — strategic rebudgeting: If there’s a large swingfrom expectedsales, say up 100% or down 30%, the CFO rebudgets because something has strategicallychanged. It’s no longer just investing more in the same areas, but an actual deep diveintowhere the highest ROIs are now coming from. When sales are positive, there’sexcitement. Onthe other hand, when sales disappoint and cash problems arise, expenses will need to be cut.This causes a lot of concern up and down the organization and can eventually lead toturnover.

Which path is best depends on whether you need to reset not just near-term targets (Scenario1) but your three-to-five year goals (Scenario 2).

OK, so we’ve established that rebudgeting is always a big deal, for several reasons. Sowhydo it?

It's sometimes abundantly clear that your budget-versus-actual roadmap has diverged so muchfrom your original plan that it doesn’t provide actionable guidance anymore.It’s uselessgoing forward, and targets need to be reset. When sales have significantly disappointed,big, strategic cuts may need to be made, and that requires deep thought. You need everybodyto buy in, including the board.

Note that I never advise rebudgeting downward unless goals really are unobtainable, andasking people to strive to make those unrealistic targets will damage morale. If yourebudget lower when you could and should have pushed harder, you risk giving everyonepermission to be mediocre.

A reach-goal encourages hard workers to say, “Okay, we're really gonna do it in thesecondhalf of the year.” That’s instead of, “Okay, phew, now we can just keepgoing at the same[unimpressive] rate.”

If you’re doing a 6+6 right, stakeholders across the organization will questionallassumptions. It’s very hands on, to the point of being invasive. Watch out forsuperficialefforts and back-channel complaints. These will need to be managed if the rebudgeting effortis to be successful.

5 Signs You Need a 6+6 Budget

A material event has occurred: The pandemic is a perfect example. I neverencourage companies to proactively slash budgets without first understanding detailedscenarios — we saw businesses cut too aggressively without supporting data, and ithurttheir long-term growth. But when variances become too large, it's time to act.

The budget was not created correctly: I’ve had to support companies inarebudgeting process when they’re off by only 5% or 10%, while others might see largervariances but are able to tweak within the existing framework. It’s something of anart toknow when to go back to the drawing board.

Your business model assumptions are flawed: This doesn’t always resultinnegative consequences. We can be pleasantly surprised that, for example, although our budgetwas built based on B2B demand, our secondary B2C channels have outperformed beyond allexpectations.

The worst case is worse: Companies go into budget exercises hoping for thebest and planning for the worst. If numbers are coming in below your worst-case scenario andyou’ve smoothed out seasonality and other temporary factors, then it’s time fora 6+6.

Cash flow liquidity has deteriorated: Maybe the budget looks, on paper, moreor less accurate. But if your cash on hand continues to decline, then you need to reevaluateall your assumptions. Continuously reviewing numbers makes you nimbler.

The 6+6 Budget Process

The finance team leads the effort to create the new budget and works intimately with thecross-functional department team heads. The CFO will take the first draft and go back andforth with the CEO until a final draft is agreed upon. This gets moved to the financecommittee for approval before being presented to the board for final sign-off. Expect lotsof Q&As and drafts flowing up and down among all stakeholders. This is definitely anall-hands-on-deck process.

I like the saying, “All’s well that begins well.” When I am in a CFOadvisory role and abudget review comes up, I first make sure we’re working with up-to-date numbers. Yourfinance team should close within 10 days of the end of the month, never more than 15 days.The quicker the better.

Now, I look at five buckets of data and ensure we’re up to date:

• Previous 12-months of financials statements
• A rolling 12-month model of projected data
• BvA: Detailed year-to-date budget-versus-actuals with explanations forvariances
• Weekly cash flow projections looking forward 16 weeks, including cashposition, receivables, payables and working capital requirements
• Profitability KPIs, such as gross profit and net profit margin andproduct profitability

Only with all this information in hand do I have confidence that the numbers I’m takingintothe rebudgeting exercise are correct.

5 Rebudgeting Rules to Live By

• No surprises! Ever.
• Constantly stay on top of your assumptions.
• Calculate your project ROIs to effectively allocate capital.
• Review your goals daily.
• Daily ask, “Where's the risk?” and “What can go wrong?”

Remember, a budget has three main functions: Prevent overspending. Set goals for employeesaround revenue generation and cost containment. And help you get additional funding if youneed it. When your budget bears little resemblance to reality, it won’t support any ofthose, and it’s time to regroup.

James Vanreusel is CEO of Vanreusel Ventures. His 20-year finance career has taken himhalfway around the world, from Belgium to the UK to Rice University Business School inTexas for an MBA in Finance & Marketing.

Vanreusel has experience as a VP with Banc Of America Securities, selling IPOs to aclient base of Wall Street investors. In 2008, he moved into a consultancy role,specializing in private equity and asset management with BlueOrchard Finance, beforemoving into the corporate world. In 2014, he relocated to San Francisco and set upVanreusel Ventures, a team of CFO consultants and financial analysts, working withfor-profit and nonprofit clients headquartered in the US with extensive internationaloperations. He is a member of CFO Leadership Council’s San Francisco Chapter.