Budgeting

Budgeting is one of the most difficult exercises, because it mixes planning with forecasting, and, as someone said, forecasting is difficult, especially with regards to the future.

Often, a zero-based-budget, which means planning from scratch, is not an option, especially in the financial industry (banks, insurances etc.), where contracts can have a long life, and their effects are usually related to the dynamics of esogenous variables, typically interest rates.

Therefore, a financial budget cannot ignore the contracts already in place, whose sensitivity to changing market conditions must be evaluated and quantified.

Different market scenarios, embedding different term structures of interest rates, can be simulated in multidimensional structures (aka cubes), thus providing a quick way to test various hypotheses.

Moreover, we can apply many kinds of “time series operators” to the historical data available, thus projecting into the future some seasonality that should be taken into account.