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Read time: 8 minutes
Last updated: 27 May 2021
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Now’s the time for a new agile approach to budgeting for financial services firms

The current situation presents firms with an opportunity to move on from traditional high-level budgeting methods. Whether you’re preparing or updating your budgets, we explore practical approaches you can use going forward, taking into consideration COVID-19’s impact.

COVID-19 has turned many aspects of our lives upside down. But it has also taught us some important lessons - particularly about planning. Arguably, the financial services sector has fared better than most because of the lessons learned from the banking crisis. The rules and guidance rolled out following the crisis had required regulated firms to put in place disaster recovery plans, capital adequacy and scenario testing, as permanent items on the agenda. While few could have predicted the impact of the pandemic, those that paid close attention to preparing for a once in a lifetime event were better equipped to minimise disruption and adjust accordingly.    

As all businesses address future uncertainties, the 2021 annual budgeting and planning process would have been particularly challenging, but vital. Traditional budgeting techniques that were dependent on using the preceding year’s results as a basis to budget for the forthcoming year now have limited credibility in 2021.

The current situation presents you with an opportunity to make a clean break away from traditional high-level methods to a more agile approach. This technique will encourage you to think outside the box, and focus on trying to predict the unpredictable. It’ll essentially be a mind-set change in how budgets have historically been prepared. Budgets should now be viewed as strategic management tools used to help drive the firm’s success, rather than just a financial planning mechanism. 

The primary goal of budgeting is to identify the full range of possibilities and risks facing an entity. Going forward, the budget will become a living instrument, that should be reviewed and updated periodically to reflect changes in the business environment. Furthermore, you can spend less time obsessing over the current income statement, as the budget process will be seen as a vital tool for value creation. 

An effective budget can provide a benchmark to evaluate if your firm’s strategy is appropriate and effective. It should also direct attention away from short-term results and towards longer-term strategic goals and the firm’s specific objectives, taking into account the operational and personnel requirements needed to support it. 

About the author

Paul Iga

+44 (0)20 7556 1239
igap@buzzacott.co.uk

COVID-19 has turned many aspects of our lives upside down. But it has also taught us some important lessons - particularly about planning. Arguably, the financial services sector has fared better than most because of the lessons learned from the banking crisis. The rules and guidance rolled out following the crisis had required regulated firms to put in place disaster recovery plans, capital adequacy and scenario testing, as permanent items on the agenda. While few could have predicted the impact of the pandemic, those that paid close attention to preparing for a once in a lifetime event were better equipped to minimise disruption and adjust accordingly.    

As all businesses address future uncertainties, the 2021 annual budgeting and planning process would have been particularly challenging, but vital. Traditional budgeting techniques that were dependent on using the preceding year’s results as a basis to budget for the forthcoming year now have limited credibility in 2021.

The current situation presents you with an opportunity to make a clean break away from traditional high-level methods to a more agile approach. This technique will encourage you to think outside the box, and focus on trying to predict the unpredictable. It’ll essentially be a mind-set change in how budgets have historically been prepared. Budgets should now be viewed as strategic management tools used to help drive the firm’s success, rather than just a financial planning mechanism. 

The primary goal of budgeting is to identify the full range of possibilities and risks facing an entity. Going forward, the budget will become a living instrument, that should be reviewed and updated periodically to reflect changes in the business environment. Furthermore, you can spend less time obsessing over the current income statement, as the budget process will be seen as a vital tool for value creation. 

An effective budget can provide a benchmark to evaluate if your firm’s strategy is appropriate and effective. It should also direct attention away from short-term results and towards longer-term strategic goals and the firm’s specific objectives, taking into account the operational and personnel requirements needed to support it. 

What are the key attributes of a good budget?

What are the key attributes of a good budget?

  • Reflecting the firm’s industry context. It’ll be consistent with estimates of your firm’s size and provide insights into how both your business strategy and the market is evolving.
  • Aligning to strategic decisions. The basis of the assumptions used should be aligned with the firm’s strategic choices about how it’ll grow and what resources it’ll require.
  • Prudent reasoning on projected growth rates. For example, in relation to assets under management should be viewed in context with the dynamics of the industry. Explanations should be provided to justify high growth rates.
Your new approach

Your new approach

Whether preparing or updating your financial projections and budgets, and taking into account events of the past year and the likely impact on the way we now work, you should consider a more practical approach as follows:

  • Budgets should be updated to reflect the firm’s post COVID-19 plans. They will encompass the new ways of working, such as less office space and travel requirements, but increased IT costs in relation to infrastructure and cyber security provisions.
  • Consider the impact of the IFPR regulation and its additional requirement for capital, liquidity and other threshold monitoring.
  • Develop multiple scenarios for revenue and expenditure and use these to stress test the budget and the underlying assumptions used to counter periods of uncertainty (for example another lockdown in the near future).
  • Consider preparing budgets based on worst-case scenarios, such as delayed cash receipts and investor redemptions, to assess the impact on capital and cash positions.
  • Identify the financial and operational levers that can be pulled to conserve and generate cash, and potentially increase access to funding and the potential squeezes on management and performance fees metrics from investors.
  • Build various options and contingencies into budgets.
  • Incorporate specific trigger points into scenario testing so management can be prepared to take pre-emptive action before the firm gets into major difficulty.
  • Prepare a wind-down plan (as required under the IFPR).
Speak to an expert

Get in touch

If you’d like to discuss further, or need help preparing your budgets and the ICARA document post IFPR, please contact your usual Buzzacott contact. 

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