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Companies Can't Quit The Budget

  • By Bill Myers, Multimedia Content Manager, FP&A, AFP
  • Published: 12/22/2017

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Years of a criticism of budgeting doesn’t appear to have dented companies’ commitments to the budget process, a new AFP member survey has found. 

More than three-quarters of member respondents agreed that budgets are a valuable tool, but a full 55 percent said their companies had a rigid budget process—11 percent of respondents viewed their budget as “iron-clad” and another 44 percent thought their budget was “tight.”

“Iron clad” was defined as “minimal flexibility with the amount planned for an outlay.” “Tight” was defined as compensation being “tied to budget numbers at various levels of the organization.”

Nonetheless, the survey did find that “the corporate world is responding to a main criticism” of budgeting—namely, that it keeps organizations from being agile in an increasingly volatile world.

Thirty percent of respondents said their budgeting was “loose”—i.e., that the budget is merely “the first forecast of the year, and only the division and organization top and/or bottom-line numbers matter”—while another 14 percent of respondents said their budgets were “non-binding”—i.e., the company relied on rolling forecasts and no budgeting process at all.

The latter developments might surely have been welcomed by Nevine White, a former executive in a mid-size telco who helped her company abandon budgeting for rolling forecasts more than two decades ago. Now an executive-in-residence at the Beyond Budgeting Roundtable North America, White spoke about her experiences at AFP’s annual conference in San Diego, in October.

The big advantage of a rolling forecast, she told a packed conference room, is that it shifts questions to, “Where is the resource needed?” For instance, a decline in sales might mean that a company needs more salesmen or –women. But it could also mean that the current sales staff just need new, better or different training.

Telecom, White recalled, was “capital intensive.” Her company literally dug up streets to lay fiber optic cables; it had a $400 million annual capital budget. But it also had no way of knowing, year-to-year, where that money was going to be spent.

“You can’t tell in advance where your customers are going to be,” she said.

That doesn’t mean that implementing a rolling forecast is easy. White and her co-presenter, Steve Player, offered several cautious notes about how to structure a rolling forecast in their presentation. Among them:

  • Focusing on “accuracy” instead of “reliability”: “Will the price of oil be higher in six months or lower?” Player asked his audience. The audience, for its part, chuckled and responded, “Yes.” His point was that it’s unreasonable to expect a forecast to predict singular outcomes; the goal is to have it offer a range of outcomes.
  • Excessive detail: The goal, Player argued, is to find a business’ key drivers and to focus on them narrowly. Too many data points disrupts the ability to gather data quickly, avoid detailed calculations and to save time for careful analysis and planning—which is the whole point of rolling forecasts in the first place.
  • Relying on “probability-based” forecasting. Here, again, Player went for humor, using a cartoon showing an analyst saying, that “it’s strongly improbably that anything should ever happen anytime, anywhere.” Some questions, Player said, are zero-sum.

“I think the biggest pitfall that people run into is not being crisp about the definitions,” White said. “Terms like ‘forecast,’ ‘plan,’ ‘target,’ ‘goal,’ ‘budget’ all get thrown around together and so if you don’t have clarity around the differences—I mean, there are specific differences between what a forecast is, what a plan is, what a target is, what a goal should be. If you don’t have clear definition and they get thrown around interchangeably in the language of your business then that makes it very difficult to have good conversations and to actually get the process moving and to keep people to buy into the process.”

White also suggested that soft skills—such as effective communication—might really help in convincing the bosses to break with the budget cycle.

“You’re definitely going to meet some resistance,” she said. “You’re working, generally, at the management levels of an organization. Many of those people have been thru traditional schooling—MBA programs, you know, learning on the job from peers and mentors who are stuck in a mode where the budget is the way to go and where rolling forecasts are seen maybe as an adjunct to it and not necessarily as a substitute for it.”

She added: “The implementation process in and of itself requires a lot of actual change management and cultural adaptability within an organization because you’re breaking all those things that people are used to—you’re breaking apart how you pay incentives, you’re breaking apart how you control the organization you’re breaking apart how you create accountability within the organization.”

It can be a lot of work, White said.

“But in the context of the benefits you reap for flexibility, for making people actually, truly manage and making them empowered and accountable—it’s just such an uplift for an organization,” she said. “And that shows up in the results. I mean, the organization that I worked in, after we switched to rolling forecasts—and I will not claim, ever that that was the only reason—but we had 40 consecutive quarters of top-line revenue growth. And that’s pretty remarkable in an industry.”

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So where does your budget fall on the spectrum? Find out this and more with the AFP FP&A Survey: Is Your Budget Relevant?

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