Beyond Forecasting: The Beauty of a Quarterly Rolling Budget
Janaury 18, 2021
As architecture and engineering (A/E) firms get up to speed in the new year, one of management’s top priorities is creating a budget. Of course, that’ll be especially important and challenging after a year that was anything but normal and therefore can’t really be used as the basis for this year’s budget.
So, many firm owners are asking, “Where do we start?” Our response is, “You’ll have to start with a whole new set of assumptions, and for many firms, a better budgeting process.”
A/E Firm Budgeting Defined
It’s important that any discussion of, or work on, a budget starts with everyone being on the same page. And a key point of clarity is the difference between forecasting and budgeting. What many firms call budgeting is really forecasting.
A forecast for this year would assume that you’re going to do essentially the same things you did last year. You’re trying to predict what will happen if you make some minor modifications to last year’s plan and numbers. You’ll use roughly the same strategies, do work for the same clients, and complete the same types of projects.
Forecasts can definitely be helpful, to a degree. Knowing what’s in your pipeline and what’s likely to be added to it is a good thing. But forecasting shouldn’t be confused with budgeting.
Budgeting goes into great depth on firm operations, and it's a useful tool for tracking and improving your performance. Forecasting, on the other hand, deals with things that are, for the most part, out of your control. The accuracy of your estimate is based on client behavior—something you can’t change. Clients may spend much more money than you expected due to improvements in the economy, for example, or they might decrease spending if the opposite is true.
Your budget is all about what your firm will do in terms of processes, project delivery, overhead costs, staffing, etc. to improve performance. These are things that can be tracked and managed. In short, a budget is essential to driving accountability and financial success.
Budgeting Has Its Limitations
Budgeting is a powerful tool for helping A/E firms thrive and grow. But it does have its limitations. If you can predict with any level of accuracy in January what your firm will be doing in September, you should consider taking your skills to Vegas! No firm can do this—and that includes those with large, ongoing projects. There are just too many variables that can change a firm’s trajectory.
For this reason, the budgeting process that most firms use is broken right out of the chute. Trying to “see” 12 months into the future ends up being mostly a waste of time and effort. Fortunately, there’s a better way.
"Using a rolling quarterly budget reveals the "levers" A/E firm managers and principals can adjust to improve performance."
Reaping the Benefits of a Quarterly Rolling Budget
What we’ve always recommended—and are emphasizing even more after the roller coaster ride that was 2020—is creating a quarterly rolling budget. You look at where you are (where your clients are, where the economy is, etc.) today and use that data to budget for the next three months. Then, you measure your performance against that budget near the end of the quarter and lay out your budget for the next three months. And so on.
What the A/E firms we work with have found through the years is that the benefits of a quarterly rolling budget are huge. This includes that:
● You eliminate the enormous, time-consuming, intimidating task of budgeting for 12 months—a task that increases everyone’s stress level since it comes when teams are already scrambling to close the current year, get ready for some time off around the holidays (for firms whose fiscal year mirrors the calendar year), etc. Whole-year budgeting is especially stressful in larger firms, where each office must go back and forth with the corporate office several times to come up with numbers that feed into the overall budget in a way that pleases executives.
● You increase the accuracy of the estimations for your firm significantly because you are, for the most part, dealing with knowns. You’ve got your work backlog, you know your rent, your payroll and benefits are set, and so forth. And if you’re part of a larger organization, your firm grasp on the variables increases the accuracy for the overall organization as well. This gives everyone peace of mind since your ability to make “course corrections” every three months means you won’t find yourself wildly off-target at the end of the year.
● With a more accurate budget—and one that leverages everyone’s insights rather than being dictated by principals or the corporate office—you get more buy-in from your operational teams. The numbers are realistic, people have a much greater sense of ownership, and you get more commitment to ensuring you reach your goals.
● There’s a snowball effect as far as accuracy goes. By applying what you learn in one quarter to the budget for the next, you continually have a better understanding of what you can expect. And plotting a series of accurate budget points on a graph lets you identify long-term trends, which is also very important.
● Budgeting becomes less of a stressful event based on last year’s numbers and more of an ongoing and forward-looking process that people stop dreading, get good at, and take pride in.
Revealing the Levers That Drive A/E Firm Success
One more benefit of using a rolling quarterly budget is that it reveals to A/E firm managers and principals the “levers” that they can adjust to improve performance. Too often, firms are essentially trying to navigate in the dark.
Being able to look back at past budgets helps you see how discretionary spending like marketing will impact your results and adjust accordingly. And as any principal will tell you, being comfortably in the driver's seat and able to steer the firm toward greater success produces a sense of confidence in the owner and throughout the firm.
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