# Budgeting and forecasting

*Building a budget people will actually use, and a forecast that tells the truth.*

## Production summary

- Modules to record: 1
- Total script: 346 words, about 2 minutes of finished audio
- Voices: Amara (host) and Nadia (practice educator)
- Level: Level 3 to 4, managers and budget holders

## Accreditation wording that must appear in the description

- **The CPD Certification Service** (planned): Application scheduled.

> Do not upgrade any of these words in a description or a thumbnail. Aligned is not accredited, and planned is not approved.


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## Building it, flexing it and explaining the variance

**Runtime** about 2 minutes. **Words** 346. **Starts at** 00:00 in the full course recording.

### Learning outcomes to state on camera

- Build a budget from underlying activity
- Classify costs as fixed, variable or stepped
- Flex a budget before comparing it to actuals
- Interpret a variance and identify the action it implies

### Script


`[CUE 1]` *Budget built from activity, each line traced back to a driver.*

**AMARA**  [00:00]
Our budget is last year plus five per cent. Everybody does that.

**NADIA**  [00:04]
Everybody does, and it fails in a specific way: nobody can explain any figure in it. Ask why the training line is what it is and the honest answer is that it was that last year, and the year before, and nobody now living knows why.


`[CUE 2]` *Fixed, variable and stepped cost behaviour on one graph.*

**AMARA**  [00:23]
So where do I start instead?

**NADIA**  [00:25]
With activity. How many clients, shifts, units or cases. Then let the costs follow from that. Now every line has a reason attached to it, and you can defend it to somebody who challenges you.


`[CUE 3]` *Stepped cost jump at the ninth member of staff.*

**AMARA**  [00:39]
Tell me about the costs that catch people out.

**NADIA**  [00:43]
Stepped costs. One supervisor covers eight staff. Take on a ninth and you need a second supervisor, and that cost arrives whole, not in one eighth slices. Percentage based budgets smooth straight over it and the jump lands as a shock in month seven.


`[CUE 4]` *Original budget, flexed budget and actual, in three columns.*

**AMARA**  [01:00]
Now the monthly meeting. We are over budget. Everybody looks at me.

**NADIA**  [01:05]
First question: did you do more than the budget assumed? If the budget was built for a hundred and you delivered a hundred and forty, of course you spent more. Flex the budget to what you actually did, then compare.


`[CUE 5]` *Forecast diverging from budget as an early warning gap.*

**AMARA**  [01:21]
And if it is still over after that?

**NADIA**  [01:24]
Now you have a real variance, and you split it. Did you use more per unit, or did each unit cost more? Those are different problems with different owners. One is operational, the other is procurement or price. A total figure alone just produces an argument.

**AMARA**  [01:43]
Last thing. Our forecast always seems to land back on the budget.

**NADIA**  [01:47]
Then your forecast is not a forecast, it is a wish with a spreadsheet around it. The budget is what you planned. The forecast is what you now genuinely believe. When they differ, that gap is the single most valuable number in the pack.

**AMARA**  [02:05]
Because it is early warning.

**NADIA**  [02:07]
Because it is the only early warning. Close it on paper and the problem still arrives, just later, and with nobody able to do anything about it.

### Sources for the on screen credit

- Management accounting principles, Chartered Institute of Management Accountants
- Budgeting and forecasting guidance, Association of Accounting Technicians
- Managing public money, HM Treasury

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