A 3 9 budget is a forecasting method that uses the most recent three months of actual financial data as a foundation for projecting financial performance over the next nine months.
Here's a more detailed explanation:
-
The "3" refers to the starting point: It leverages the actual data from the most recent three months. This data includes key figures such as:
- Sales Revenue
- Operating Costs
- Other financial metrics (e.g., accounts receivable, inventory levels)
-
The "9" refers to the forecast horizon: It projects these figures, along with strategic goals and market conditions, nine months into the future. This provides a near-term financial outlook.
How it works:
- Gather Recent Data: Collect sales figures, operational expenses, and market data from the past three months.
- Analyze Trends: Analyze the collected data to identify trends, seasonality, and any significant changes.
- Develop Assumptions: Based on the trend analysis, develop assumptions about future performance considering factors like:
- Market conditions
- Strategic initiatives
- Potential risks
- Create Projections: Project the financial performance for the next nine months using the recent data and developed assumptions.
- Regular Review and Adjustments: Budgets are not static. Continually review the budget against actual results, making adjustments as needed to improve forecast accuracy.
Benefits of a 3 9 Budget:
- Relatively Simple: It’s easier to implement than more complex budgeting models.
- Adaptable: It allows for more responsiveness to recent changes and trends in the market, since a portion of it is based on the very recent past.
- Short-Term Focus: Provides a near-term financial roadmap, facilitating better short-term decision-making.
Limitations:
- Short-Sighted: It may not adequately address long-term strategic goals or investments.
- Reliance on Recent History: If the past three months are atypical, the forecast may be skewed.
- Requires Regular Updates: The model needs frequent updates as new actual data becomes available, and market conditions change.
Example:
Imagine a retail company. They would use the past 3 months of sales data (including any promotional periods), expense reports (staffing, utilities, marketing spend), and market trends (competitor actions, consumer behavior) to forecast sales, expenses, and profitability for the subsequent 9 months. They might factor in expected seasonal trends, planned marketing campaigns, and anticipated changes in supply costs into their projections.
