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For many small businesses, creating an annual budget is a familiar ritual. But what happens when the world refuses to sit still for twelve months? In the past few years, business owners have weathered one surprise after another – from pandemic lockdowns to supply chain disruptions to rapid inflation. 

Each new shock has turned budget planning into a frantic exercise in putting out fires. As one report put it, “the uncertainty has been unrelenting” and traditional budgeting methods simply aren’t keeping up. A static yearly plan, based on last year’s conditions, can become hopelessly out of date by the time you’re only a few months in.

Clearly, it’s time to rethink the process. Instead of treating budgeting as a once-a-year ordeal, we need to make it a more agile, continuous part of running the business. According to a July 2025 McKinsey analysis, the key is to align budgets closely with strategy, use granular data (rather than blanket assumptions), and speed up your budgeting cycle to match real-time business needs. Underpinning all these changes is a commitment to using technology for up-to-date insights and efficiency. 

In this email, we’ll explore how you can apply these ideas in a small business context – and challenge some old assumptions along the way.

Why Traditional Annual Budgets Fail in a World of Constant Change

Annual budgets worked fine in a steady, predictable world. But today’s environment is anything but predictable. Market conditions can change drastically within months or even weeks. A budget set 12 months ago is often out of sync with reality by mid-year. The pace of change has simply accelerated – think about how quickly businesses had to pivot during COVID-19 or adapt to sudden cost spikes. A yearly planning cycle is just “too long and slow” for these volatile conditions. Opportunities and risks don’t wait for next year’s plan.

Another issue is rigidity. Once numbers are set in an annual budget, some businesses treat them as gospel. Managers hesitate to deviate from the plan even when warning signs appear, simply because “it’s not in the budget.” Meanwhile, new opportunities might be missed because there’s no process to reallocate funds until the next cycle. If the environment shifts and you stick stubbornly to an old plan, your budget becomes a straitjacket instead of a tool.

In uncertain times, the knee-jerk reaction is often to freeze spending or make across-the-board cuts to protect profits. But this blunt, one-size-fits-all approach can backfire. McKinsey researchers observed that such measures often create a situation where “next year’s budget fails to fund even the first year of a company’s strategic plan”. In other words, by cutting everything equally or staying on last year’s course, you may starve the very initiatives that would secure your future. The reality is that today’s uncertainty isn’t going away – if anything, changes will come even faster. Sticking to a static annual budget in a dynamic world is a recipe for constantly playing catch-up.

Align Your Budget with Your Strategy (In Real Time)

Budgets exist to enable your strategy, not the other way around. Yet all too often, budgets and strategic plans drift apart during the year. When conditions change, many businesses either (a) stay the course with last year’s allocations, or (b) cut costs everywhere to weather the storm. Both approaches can hurt you: you end up under-funding your real priorities. 

If you respond to uncertainty by simply sheltering in place or trimming every department by 10%, you might find that “over time, such approaches can create a situation in which the next year’s budget fails to fund even the first year of a company’s strategic plan”. In plain terms, you could starve your growth initiatives because you didn’t adjust your budget to reflect a new reality.

To avoid this, make budgeting a continuous conversation with your strategy. Instead of “set it and forget it” for 12 months, set aside time regularly (for example, monthly) to revisit your budget in light of current conditions. Ask yourself: Are we funding what matters most right now? If the market has shifted or a new opportunity has emerged, you may need to redirect resources on the fly. Likewise, if an initiative isn’t panning out, you shouldn’t keep throwing money at it just because it’s in the original budget.

One practical way to align budget and strategy in real time is through frequent mini-strategy reviews using scenario planning (more on that later). Build a few “what if” scenarios into your financial model and update them as new information comes in. Especially when things are in flux, step back and look at how your actual performance compares to the scenarios you forecasted. This makes it easier to engage your team in decisions about where to allocate funds next. 

If performance against budget is beating expectations, you might decide to “double or triple down” on those successful initiatives; if expectations aren’t met, you can scale back rapidly and redeploy that capital elsewhere. The goal is to always ensure your spending is driving your strategy forward – and to be ready to adjust quickly when it isn’t.

In short, keep your budget flexible and responsive. Treat it as a living extension of your strategy. By continually realigning your budget to your strategic goals, you ensure that every pound is working towards the company’s success, even as the world around you changes.

Get Granular with Your Financial Data

When the business environment was more predictable, you might have gotten away with broad-brush budgeting (e.g. “increase all expenses by 5% next year”). Not anymore. Now, granularity is essential. You need to dig into the details of your financial data and performance metrics to make smart decisions about resource allocation. The reason is simple: not all parts of your business are affected equally by a given change. By examining things at a finer grain, you can spot exactly where a tweak is needed, rather than using blunt cuts or across-the-board boosts.

For example, suppose your sales suddenly dip. A high-level view might panic you into slashing spending across the board. But a more detailed look could reveal why sales are down. Is it because customers disappeared? Or is it because you couldn’t get enough product to sell that month? 

As the McKinsey article notes, “a temporary supply chain challenge may make it seem as though a company’s top line is tanking when the reality is that supply-side constraints are driving down sales. A granular view of performance metrics can help...identify and explain anomalies like this.” In a case like that, cutting your marketing budget (thinking demand is down) would be the wrong move – the real fix might be to resolve the supply issue. Without granular data, you might misdiagnose the problem.

The most effective financial leaders avoid blanket rules like “cut 10% everywhere.” Instead, they dive deep into the numbers and often welcome exceptions in their budgets – precisely because they understand the specifics of their business. As a small business owner, you should identify the key drivers of your revenue and costs and examine them individually. 

Maybe 20% of your products make up 80% of your sales – those should be tracked closely. Maybe one service line has much higher margins than others – that one might deserve more investment, not a cut. By regularly conducting detailed breakdowns of your most important products, services, customer segments, or locations, you can pinpoint where money is best spent (and where it’s being wasted).

Granular data also lets you allocate resources more intelligently. Instead of treating every expense category equally, you can make nuanced decisions. For instance, you might discover that one marketing channel yields far better ROI than others – so you increase budget there and trim the less effective channels. Or you might find one product line is consistently underperforming – so you cut its costs to zero (essentially zero-basing it) and reallocate those funds to a growing product line. This targeted approach beats broad, blind cost-cutting every time.

How can you get granular? 

Leverage your tools. Cloud accounting software like Xero can help by providing detailed breakdowns of your finances. Use tracking categories or tags in Xero to segment income and expenses by product, project, region, or any category that matters to you. Then review those reports regularly. For example, instead of looking only at total “Sales” each month, break it down: sales by product type or by client type. 

Instead of a single “Operating Expenses” line, examine what portion is rent, which part is salaries, which part is marketing, etc., and how each is trending. The more you know about the components of your business performance, the more precisely you can tune your budget. Granularity gives you insight – and insight leads to smarter budgeting decisions.

From Static Budgets to Dynamic Forecasting

If you’re only revisiting your financial plan once a year, you’re effectively flying blind for the other eleven months. A static budget quickly becomes stale in a fast-changing environment. The alternative is to adopt dynamic forecasting – in plain terms, update your budget (or forecast) frequently with the latest data, so it’s always a current reflection of your business. This turns budgeting from a one-time prediction into an ongoing process that adapts as reality unfolds.

Large companies have already moved in this direction. They often implement rolling forecasts and dynamic budgets, where performance data is updated and analyzed in real time. You can do the same on a smaller scale. Instead of waiting for the year-end review, you might do a light re-forecast every month or every quarter. Using your latest sales figures, expenses, and market info, adjust your projections for the rest of the year. 

This doesn’t have to be a huge undertaking – with modern accounting software, a lot of the data gathering can be automated, so it’s more about reviewing the numbers and making decisions.

The benefit of frequent forecasting is agility. No more nasty surprises at year-end, because you’ve been course-correcting along the way. If fuel costs spike unexpectedly in April, a dynamic forecast would catch it and you’d adjust other parts of your budget in May or June to compensate – rather than discovering in December that you overspent. If sales are trending 15% higher than expected, a dynamic approach lets you decide how to wisely invest that windfall early, perhaps to drive even more growth. 

In short, you sense and respond instead of “set and forget.”

A clever tactic to manage this is to vary the cadence of reviews for different parts of your budget. Not everything needs the same level of frequency. Some aspects of your business are relatively stable or slow-changing – you can review those quarterly or even annually. Others are volatile or crucial to survival – those you should monitor much more often. 

In the McKinsey study, one tech company’s finance team broke products into two groups: a long-cycle group (reviewed annually) and a high-risk group (reviewed monthly with near real-time decisions on whether to pull back or add funding). You can apply a similar idea. For example, you might decide to review your cash flow and sales pipeline every week (fast cycle) while reviewing fixed overhead costs only once a quarter (slow cycle). Or if you run an e-commerce business, you could monitor your digital ad spend and customer acquisition cost daily, but look at your yearly insurance policy expense just a couple of times a year. Matching the cadence of budgeting to the speed of change in each area keeps you responsive without getting overwhelmed.

Another useful approach is to build in triggers or contingencies for your spending. This is sometimes called contingent budgeting. Essentially, you plan in advance what you’ll do if certain conditions are met (or not met). For instance, you might say: “If our monthly revenue falls below £50k, then pause all non-essential spend until it recovers,” or “If product X exceeds its sales target, then immediately allocate an extra £10k from our reserve to boost marketing for it.” 

Some companies even set aside a pot of discretionary funds and deploy it flexibly based on need. In one example, a company’s CFO held a central fund for post-pandemic investments and released those monies region by region depending on demand recovery. Small businesses can use the same logic on a smaller scale – have a Plan B budget ready for certain scenarios. Tying budget changes to real-world triggers means you won’t hesitate when it’s time to act; the decision framework is already in place.

The bottom line: treat your budget as a living document rather than a static decree. Continually update your forecasts with fresh data, review fast-moving parts of your business more frequently than the slow-moving parts, and use triggers to pre-plan your responses to different outcomes. This dynamic approach ensures that your “budget” is never out-of-date – it evolves with your business, keeping you prepared and proactive.

Using Real-Time Tools Like Xero to Stay Agile

None of these agile budgeting practices would be feasible without good data at your fingertips. This is where technology becomes a small business owner’s best friend. Cloud accounting platforms like Xero give you instant visibility into your financials – no waiting for the end of the month, no emailing spreadsheets back and forth. When your bank transactions, invoices, and bills are all flowing into one system automatically, you can see the state of your business in (or near) real time. And when you have real-time data, you can make real-time decisions.

Using technology to enable agile budgeting isn’t just a nice-to-have; it’s increasingly a must-have. McKinsey recommends that companies ensure “everyone has access to a single source of truth” – essentially a standard, centralized set of financial data linked to the key performance indicators of the business. 

With a system like Xero, you can achieve exactly that. Xero becomes the single source of truth for your finances: all your team members (and your accountant or bookkeeper) can work from the same up-to-date numbers, whether they’re looking at profit margins, cash flow, or expenses. There’s no confusion about which version of the spreadsheet is the latest or whose numbers are correct – it’s all in one place, updated instantly. This kind of clear, consistent data is the foundation for meaningful budgeting in a fast-paced world. After all, “without clear, consistent, accessible numbers, it’s impossible to conduct meaningful budgeting”.

Real-time data tools also open the door to more sophisticated analysis that used to be the domain of big corporations. These days, even a small business can leverage analytics and forecasting software. For example, Xero itself offers basic analytics and short-term cash flow projections. Additionally, there are many apps in the Xero ecosystem (and other cloud tools) that can plug into your data and help with budgeting, forecasting, and scenario planning. 

Imagine being able to test scenarios on the fly: “What if our monthly sales jump 20%? What if they drop 20%? What if we invest an extra £5,000 in marketing next quarter?” With the right tools, you can plug in these hypotheticals and immediately see the impact on your cash flow and profits. In fact, many CFOs are exploring advanced digital tools to ensure they’re always using the most updated information to build forecasts and stress-test scenarios. 

The good news is, as a small business owner you don’t need a whole data science team to do this – often it’s as simple as using a cloud dashboard or an add-on that draws from your Xero data.

The upshot is that technology can dramatically accelerate your decision-making and improve the accuracy of your forecasts. Instead of relying on gut feel or outdated reports, you’ll be basing decisions on current, high-quality information. And because cloud software is accessible anywhere, you can collaborate with your team or advisors in real time. 

For example, you and your accountant can both log into Xero and discuss the same set of live figures over a video call – looking at a cash flow report or budget vs. actuals – and make decisions together on the spot. This kind of responsiveness and collaboration simply isn’t possible when you’re stuck in the old world of static spreadsheets that are updated once in a blue moon.

Takeaway: Embrace the tools available. They will save you time (by automating data entry and reporting), provide clarity (through real-time dashboards and visualisations), and enhance your agility (through features like instant forecasting and scenario analysis). In a world of constant change, having real-time insight into your business is a powerful advantage.

New Approaches to Budgeting for Uncertain Times

So how can you put these ideas into practice? Here are a few fresh approaches to budgeting that can help your small business stay ahead of the curve:

• Zero-based budgeting (ZBB): Start from scratch, every time. Instead of just taking last year’s budget and adding a percentage, consider rebuilding your budget from the ground up for each new period. Question every expense: if it doesn’t bring value or align with your strategy, do you really need it? In uncertain times, some companies rely on ZBB principles to “fully rethink which costs are actually needed and where they’re needed to create the most impact”. For a small business, this might mean reviewing each subscription, supplier contract, and project expense to justify its necessity. One radical tip from big-company CFOs: pretend last year’s budget doesn’t exist at all. In fact, some CFOs even automatically reject any default carry-over of last year’s spending – the way a system rejects an old password – so every line item must earn its place anew. You don’t have to be that extreme, but adopting a zero-based mindset even for a portion of your budget can reveal savings and priorities that an incremental approach might overlook.

• Fast vs. slow cycle reviews: Prioritise what you review (and how often). Not everything in your business needs the same budgeting rhythm. Identify which areas are “fast-cycle” – rapidly changing or high-risk items that warrant frequent check-ins – versus “slow-cycle” areas that are more stable and can be reviewed less often. This idea comes from larger companies that split their budgeting process this way, and it can work for small firms too. For example, you might review your cash flow and sales forecast every week or month (fast cycle), while only revisiting your annual insurance costs or long-term rent contracts a couple of times a year (slow cycle). Similarly, a new product launch or aggressive marketing campaign might get a monthly budget review, whereas routine office expenses might be fine on a yearly review. Tailor the cadence to the nature of the expense or initiative. By focusing your frequent attention on the areas that move quickly or carry the most risk, you won’t be caught off guard by fast-moving issues – and you won’t waste energy constantly rehashing things that don’t change much.

• Scenario planning: Always have a Plan B (and Plan C). “What if our biggest client left tomorrow? What if raw material costs double next month? How would we cope if we doubled our marketing spend and demand surged?” Small businesses should routinely pose these kinds of “what if” questions and sketch out the answers. Rather than hoping for the best, prepare for a range of outcomes.The McKinsey article suggests going back “again and again” to probability-weighted scenarios built into your plans – essentially, constantly testing your strategy against alternative futures. In practice, you might create a simple best-case, base-case, and worst-case version of your budget. For instance, a worst-case scenario might assume 20% lower sales and include specific cost cuts you’d make in that event. A best-case scenario might assume 30% higher sales and outline where you would invest the extra profit. 

Using tools (even just a spreadsheet or a feature in Xero) to model these scenarios can be eye-opening. It forces you to think ahead about how you’d respond to both setbacks and opportunities. If the worst-case starts to come true, you’ll know which expenses to trim first and how to preserve cash. If an upside scenario happens, you’ll have a plan for scaling up – whether that’s hiring staff, increasing inventory, or pumping more into marketing. Scenario planning turns surprises into something you’ve already thought through, so you can react calmly and strategically instead of in panic mode.

By experimenting with approaches like these, you make your budgeting process more resilient. The goal is not to predict the future perfectly (no one can), but to be ready for whatever happens – and to ensure your resources are always aligned with your most important goals.

Questions to Challenge Your Current Budgeting Process

To wrap up, here are some strategic questions to ask yourself. These can help you reflect on your current budgeting approach and identify areas to improve:

• Are you sticking to an annual budget out of habit, even when conditions have changed?
• How often do you update your financial forecasts? (Is it only once a year, or do you revise your outlook throughout the year as things change?)
• Does your budget truly reflect your strategic priorities? (Or is it basically last year’s plan with a few tweaks, disconnected from your current strategy?)
• Do you have granular visibility into your business drivers? (For example, can you see which products or services are performing best, and are you budgeting accordingly?)
• Do you regularly consider multiple scenarios? (Ask yourself if you have a game plan for both bad and good surprises – or are you caught off guard by every unexpected event?)
• Are you leveraging real-time data and tools in your budgeting process? (Could platforms like Xero or other software give you a more up-to-date, accurate view, versus using static spreadsheets or gut instinct?)

Reflect honestly on these questions. The aim is to spot where you might be holding onto outdated practices and where you can adopt a more agile mindset.

In today’s climate of accelerating uncertainty, the businesses that thrive are usually those that plan ahead and yet remain flexible. By aligning your budget with your strategy, diving deep into data, forecasting dynamically, and using the best tools available, you can turn budgeting from a tedious annual chore into a powerful ongoing process. This process will help your small business stay resilient, responsive, and ready to seize opportunities – no matter what twists and turns come next.

Noel Guilford

PS If you'd like my help to find out how you can use Xero can improve your budgeting process drop me a line.