Budgeting : “The trend is your friend”?

During budgeting, we often rely on historical trends to model the following year budget . The reasons for this reliance are that it is readily available and factual in nature. Both are very valid points

However there is a risk of over-reliance. Historical trends are just patterns of data. They show what had happened but do not explain why the numbers are what they are. Therefore if one just extrapolate a current year revenue trend to budget for the following year’s revenue, one will be hard-pressed to answer the “why” questions of higher management  during their reviews.

“The trend is your friend” – true but you have other friends during budgeting, friends like expense bottom-up analysis, revenue top-down analysis (understanding the industry and market share of your company). Make friends with them and your budget will be more robust.