Delivering bad news is an inevitable part of my role as an outsourced CFO. One of the toughest messages I often have to convey is telling department leaders they need to start over on their budgets. This typically happens when the company has veered far off its original roadmap, and the existing budget no longer aligns with reality.
In such cases, a common solution is a budget recalibration exercise, such as the 3+6, 6+6, or 9+3 model. Among these, the 6+6 approach is the one I use most frequently. This involves creating a new budget based on six months of actual performance and six months of updated forecasts. When expectations set in the original budget aren’t materializing, it’s a clear signal that a reset is necessary. Armed with half a year’s worth of real data, we can build a far more accurate projection for the remainder of the fiscal year.
Rebudgeting mid-year is a demanding process, impacting not just business leaders but finance teams as well. Even when the news is good—like higher-than-expected sales—the workload is significant. In these cases, while you might avoid being labeled the bearer of bad news, the extra effort required still disrupts workflows and schedules.
When actual performance diverges significantly from budgeted expectations, there are two primary courses of action:
Tactical Reforecasting
In this approach, the board-approved budget remains in place, but adjustments are made at the departmental level. As the CFO, I might tell leaders, “We’re increasing investments in key areas to sustain growth. If you need a budget increase of up to 5%, go ahead without additional approvals. Anything above that requires executive review.” This allows for flexible, incremental changes without overhauling the entire budget.
Strategic Rebudgeting
This method is for more significant deviations, such as a 100% surge in sales or a 30% decline. In these scenarios, the original budget is abandoned in favor of a completely new one. Strategic rebudgeting dives deeper, reallocating resources to optimize returns. When sales are booming, this process can generate excitement. But if sales plummet and cash flow issues arise, it often triggers tough decisions, including cost cuts and even layoffs. Such measures can shake the organization, impacting morale and potentially leading to higher turnover.
The choice between these paths hinges on whether short-term adjustments suffice or if the company needs to reset its long-term goals.
Why Rebudgeting Matters
Rebudgeting is never undertaken lightly. It disrupts routines, demands extra effort, and often raises concerns across the organization. So why do it? Simply put, when the current budget no longer provides actionable guidance, it becomes a liability. A roadmap that diverges significantly from reality can’t help you navigate forward. In such cases, continuing with the existing budget is not only ineffective but could also be detrimental to the company’s long-term health.
Strategic cuts may be unavoidable when sales underperform significantly. However, it’s crucial to strike a balance. I advise against lowering targets unless it’s absolutely clear that the original goals are unattainable. Unrealistic targets can damage morale, but lowering the bar prematurely can breed complacency. A well-calibrated reach goal can push teams to rally and aim higher, particularly in the latter half of the year.
Making 6+6 Work
A 6+6 budget recalibration requires full organizational buy-in. Every assumption must be scrutinized, and the process is often invasive. It’s not uncommon to encounter resistance or superficial compliance, with stakeholders voicing concerns in private. Managing these dynamics is essential for a successful rebudgeting effort.
Ultimately, rebudgeting—especially in the form of a 6+6 exercise—provides a clearer financial outlook. It aligns goals with current realities and empowers the organization to navigate challenges more effectively. While it’s never easy, the benefits of recalibrating outweigh the discomfort it brings.
5 Clear Signs It’s Time for a 6+6 Budget Adjustment
1. A Major Event Has Disrupted Operations
Extraordinary events like the pandemic can wreak havoc on even the best-laid financial plans. While it’s essential to avoid knee-jerk reactions—such as slashing budgets without a full understanding of potential outcomes—there comes a point when variances grow too large to ignore. Acting on solid data rather than speculation is key to protecting long-term growth. If an event causes your financial trajectory to deviate significantly, it’s time to consider a 6+6 budget to realign with the new reality.
2. The Initial Budget Was Flawed
Not all budgets are created equal. Sometimes, even a small variance of 5-10% necessitates a complete rebudgeting process, while other times, companies manage to stay on track despite larger discrepancies by making smaller tweaks. Knowing when a budget requires a full overhaul versus minor adjustments is part science, part art. If the original budget wasn’t carefully crafted, leading to widespread inconsistencies across departments, it’s a strong indicator that a 6+6 framework is necessary to regain control.
3. Business Model Assumptions Are Off
Budgeting relies heavily on assumptions, and when those assumptions don’t hold, it can lead to unexpected outcomes—sometimes good, sometimes bad. For instance, if your budget was based on strong B2B sales but your B2C channels unexpectedly outshine them, your current financial roadmap may no longer reflect your actual growth opportunities. Whether these discrepancies present challenges or advantages, recalibrating your budget to reflect the reality of your business model is crucial to sustaining momentum or addressing gaps.
4. Worst-Case Scenarios Are Playing Out
Budgets are typically designed with a range of scenarios in mind, from optimistic to worst-case. However, when actual performance falls below even your most conservative estimates, it’s a red flag. After accounting for temporary factors like seasonality, if your numbers remain dire, a 6+6 budget can help you take decisive action. This recalibration ensures that your resources are allocated where they’re most needed, helping to mitigate the risks of prolonged underperformance.
5. Cash Flow is Tightening
Sometimes, the issue isn’t immediately apparent in the budget itself. On paper, everything may seem aligned, but declining cash reserves tell a different story. If your liquidity is deteriorating, it’s a sign that your operational assumptions need a hard look. By adopting a 6+6 budget, you can regularly review and update your financials, improving your agility and enabling quick course corrections before cash flow problems escalate.
Why a 6+6 Budget Matters
A 6+6 budget isn’t just about fixing numbers—it’s about staying adaptable in the face of change. Whether you’re dealing with unforeseen market shifts, flawed initial assumptions, or liquidity concerns, this budgeting approach allows for a more dynamic response. It helps ensure your company remains on a sustainable path, even when the business landscape becomes unpredictable.
Mastering the 6+6 Budget Process
Creating a 6+6 budget is a collaborative and iterative process that requires the active involvement of multiple stakeholders. The finance team spearheads this effort, working closely with department heads across the organization. The CFO drafts the initial version, which is refined through discussions with the CEO until a solid draft emerges. From there, the proposal moves to the finance committee for review and approval, before finally landing on the board’s desk for sign-off.
This process isn’t a simple top-down exercise. Expect a constant flow of questions, feedback, and revisions as the draft makes its way through the various layers of leadership. Everyone involved—finance, department heads, executives, and board members—must be ready to contribute, making this an all-hands-on-deck initiative.
Starting Strong: The Foundation of a Successful Budget
I’m a firm believer in the adage, “All’s well that begins well.” In my role as a CFO advisor, when it’s time for a budget review, the first priority is ensuring we’re working with accurate, up-to-date data. Speed is crucial here. A competent finance team should close the books within 10 days of month-end, and never more than 15 days. The sooner the numbers are available, the better the analysis and decision-making.
The Five Key Data Buckets
To approach the 6+6 budget with confidence, I ensure that five critical data sets are up to date and accurate:
- Past 12 Months of Financial Statements: This provides a comprehensive view of the company’s historical performance, highlighting trends and variances that can inform future projections.
- Rolling 12-Month Forecast: A continuously updated projection model offers a dynamic view of expected performance, enabling the company to anticipate challenges and opportunities.
- Budget vs. Actuals (BvA) Analysis: This detailed report shows year-to-date variances between the original budget and actual results. Each variance must be accompanied by clear explanations to identify underlying causes.
- Weekly Cash Flow Projections (16-Week Horizon): Cash is the lifeblood of any business. Projections should account for cash on hand, receivables, payables, and working capital needs. This ensures liquidity management is proactive rather than reactive.
- Profitability KPIs: Key performance indicators such as gross profit margin, net profit margin, and product-level profitability provide insight into the efficiency and health of the business. These metrics are essential for making informed decisions about where to allocate resources.
Confidence in the Numbers
Having these five data sets in place is non-negotiable. Without them, any rebudgeting effort is built on shaky ground. With reliable data, the 6+6 budgeting process becomes a powerful tool for steering the company toward its goals. It enables leadership to make informed, strategic decisions, even in the face of uncertainty.
In the end, the success of a 6+6 budget depends not just on the process itself, but on the quality of the data driving it. By ensuring accuracy and fostering collaboration, organizations can leverage this approach to stay agile and resilient.
5 Essential Rebudgeting Principles for Success
1. Avoid Surprises at All Costs
Budgeting is no place for unexpected developments. Ensure transparency and maintain a proactive stance by frequently revisiting and communicating key financial metrics. Surprises not only disrupt the flow of operations but can also erode trust among stakeholders. The goal is to keep everyone on the same page, minimizing the likelihood of unforeseen budgetary shocks.
2. Monitor Assumptions Relentlessly
A budget is only as good as the assumptions underpinning it. These assumptions—whether related to market conditions, customer behavior, or operational efficiency—must be regularly reviewed and updated. Staying vigilant ensures your financial plan reflects the current reality and helps you pivot quickly when circumstances change.
3. Focus on Project ROI for Smart Capital Allocation
Capital is a finite resource, and effective allocation is key to driving growth. Calculating the return on investment (ROI) for each project allows you to prioritize initiatives that will deliver the highest value. This ensures that every dollar spent aligns with your strategic objectives and contributes meaningfully to the bottom line.
4. Keep Your Goals Front and Center
Financial goals shouldn’t be revisited only during quarterly reviews or year-end meetings. Make it a habit to evaluate them daily. Regularly tracking progress toward revenue targets, cost containment, and profitability keeps your team focused and aligned with the organization’s overarching objectives.
5. Proactively Assess Risks Every Day
Effective rebudgeting isn’t just about crunching numbers; it’s also about anticipating what could go wrong. Ask yourself daily: “Where are the risks?” and “What could derail our plans?” This mindset helps you identify potential pitfalls early, enabling you to mitigate them before they become critical issues.
The Purpose of a Budget
At its core, a budget serves three critical functions:
- Prevent Overspending: By establishing clear financial limits, a budget keeps your spending in check and ensures sustainability.
- Set Performance Targets: It aligns employee efforts with revenue generation and cost containment goals, driving accountability.
- Support Funding Requests: A well-structured budget builds confidence among investors and lenders, making it easier to secure additional funding when needed.
When your budget no longer reflects reality, it fails in all three areas. In such cases, a thorough review and rebudgeting exercise become imperative to regain control and chart a viable path forward.
Closing Thoughts: Rebudgeting with Confidence Using NetSuite
Rebudgeting is a critical process for keeping your business aligned with its goals, especially in rapidly changing environments. With the right principles in place—avoiding surprises, staying on top of assumptions, focusing on ROI, and proactively managing risks—you can ensure your budget remains a powerful tool for driving success.
NetSuite makes this process seamless. Its robust financial management features, including real-time data visibility, advanced forecasting tools, and dynamic reporting, empower your team to execute rebudgeting exercises with precision and confidence. Whether you’re navigating tactical adjustments or strategic overhauls, NetSuite provides the insights and automation needed to keep your organization agile, efficient, and prepared for whatever comes next.
