Quick Insight
Planning accuracy diminishes the further into the future that we plan. Planning accuracy also diminishes the further that targets vary from current production. Budgeting far into a highly uncertain future may be futile.
We don't know the curvature, or rate of change, of revenue's diminishing returns. We don't know where capacity limits lie. We don't know the timing and amounts of step costs.
If this is the case, we may decide not to budget for a full year. Instead, we may budget until we need to incur the next significant step fixed cost. Use higher-level forecasts beyond that.
As you near the next step cost to reassess your assumptions and create a new budget. This means budgeting is not paired to annual cycles but to significant step cost increments.
- Rob Stephens
Founder of CFO Perspective and the Finance and Strategy Toolkit (FAST)