Once a business budget or forecast is built, it’s also a good opportunity to run at least two other scenarios. These are useful for preparing you for potential outcomes other than your budget. They also help you build a better budget.
In addition to the main budget, project a “best case” and a “worst case” scenario. This is sometimes referred to as “bookending” or “bracketing.”
Some do this just by adjusting revenue, costs of goods, or administration costs. It’s better to change underlying assumptions and then calculate the changes to revenues and costs. It’s a form of sensitivity testing of assumptions. You may find that certain assumptions have a big impact on outcomes.
You may envision a particularly good or bad scenario and use estimated assumptions of that scenario. Another option is to just adjust major assumptions favorably or unfavorably to the budget.
Bracketing stretches your field of vision for potential outcomes. This may help you see actual changes that occur. As Chip and Dan Heath say in the book Decisive, “The future isn’t a point; it’s a range.”
People make more accurate estimates when they consider the high and low amounts at the same time. This means you may want to do some bracketing of assumptions while setting them before and during the budget process.
Bracketing helps you anticipate potential outcomes and prepare for them. You may find an opportunity you want to prepare for or a risk you want to mitigate. You may decide to adjust your baseline budget for these opportunities or risks. You can quickly adjust plans if the business environment trends toward the alternate scenario.
Considering large changes in volumes causes you to consider step fixed costs. These can be ignored when making smaller changes to the target volume of a business budget but can’t be forgotten for planning. You may discover additional step fixed costs that are required to achieve budgeted volumes.
To learn more about how to improve your budgeting process, check out my Better Budgeting course.
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