“The biggest problem with most traditional budgets is that they’re based on a bunch of assumptions.... Assumptions about what the economy’s going to do, assumptions about future competitive actions, future customer actions, governmental actions, regulation, currency movement, a whole series of things, the vast majority of which are outside the control of the organisation.
“And when those assumptions turn out to be wrong, the plans based on them pretty much are wrong, too.”
- Steve Player quoted in Boot the budget? Why rolling forecasts might make more sense
I have been advocating for six-quarter or eight-quarter rolling budgets for years - mostly falling on deaf ears. "It's too hard." "It takes too much time." "We would be doing budgets all the time, and we barely survive budget season now." These are some of the typical responses I hear.
When business is steady and operations straightforward, budgeting is a wonderful thing (well not quite). But when markets are choppy, sales volatile, or financing sources skimpy or non-existent, annual budgets can become boat anchors if managers continue spending resources based on their "budgets."
For many companies, planned annual revenue growth has become hard to achieve, often due to factors beyond their control. Some companies are relying on semi-annual "re-forecasts." For others, those re-forecasts have become quarterly events. Rolling forecasts have frequently become necessary just to survive.
Better to be nimble by adopting more flexible budgeting/forecasting processes while training your managers to understand that spending budgets are preliminary guidelines, not authorizations to write checks.
Each significant expenditure or new personnel hire should be scrutinized to ensure that the expected activity is likely to generate a business result consistent with the company's current business plans and market expectations.
And don't forget that your compensation plans need to be aligned with the volatile operating environment. If bonuses are based solely on annual business plans which are never met, employee morale will suffer. Owners, CEOs, and board of directors have a tricky task in developing motivational incentive plans while remaining responsive to the current public hue and cry for "pay-for-performance" compensation programs.
Comments