This is the second in a series of three articles considering whether budgeting and planning is now an outdated discipline. Given the rapid rate of change and high levels of unpredictability in the world today, should accountants press reset on the corporate performance management landscape? In this article, Phillips explores if it is possible to budget at the speed required today.
Over the course of 2020 and 2021, CFOs very rapidly realised that the typical annual budget cycle was no longer helpful. It neither set them up to be able to deal with the challenges that were coming in thick and fast nor did it allow them to help their organisations take advantage of opportunities.
Many companies around the world, including our clients, reported shifting to quarterly forecasting and budgeting cycles. If that had seemed unthinkable, it very soon became outdated itself, with companies moving to monthly forecasting and needing the ability to make budget changes swiftly and on the spot. Currently, progressive companies have landed on a budget cadence that can be as short as four weeks, with weekly review sessions.
Research by Gartner says this trend will continue into 2022, with 72% of CFOs prioritising improving the flexibility of budgeting and forecasting this year, and 60% focussing on initiatives that allow them to reallocate capital in line with changing demands.
First pragmatic, then strategic Initially, this shift was for pragmatic reasons – to manage cash flow during the health crisis – but the agility and flexibility that a more frequent budget cadence introduced brought along clear competitive advantages. Notably, it allowed companies to identify, analyse, and take advantage of the opportunities that, despite the pandemic, were out there in the market including acquisitions, divestments, launching new products, entering a new market, or an even more dramatic pivot.
So far so good. But also, easier said than done. If it takes your organisation a few months of juggling spreadsheets and coaxing information from your non-financial managers to do your planning and build your annual budget, it is simply not feasible to consider more frequent planning and budget cycles. You would end up locking your company up in continuous budgeting and getting nothing else done.
To budget more frequently, we can’t continue budgeting in the same way we have always done. That would be akin to taking your Mercedes sedan for a spin on a Grand Prix track and expecting to beat Lewis Hamilton. There’s nothing wrong with your sedan, and it’s no doubt served you well, but it’s simply not fit for purpose given today’s requirements. Similarly, if your current budget process takes you three months to produce an annual budget, you will never be able to support a more frequent budget cadence.
Tapping into your people at the coalface As companies started shifting to quarterly, and then even more frequent, budget cycles to navigate the pandemic, they needed to change how they did things in several ways. One critical change was how CFOs and their teams engaged with non-financial staff. These are the managers who are at the coalface of the organisation, with the up-to-the-minute insights and data on what is really happening day-to-day. Yet too often they are in effect excluded from the budgeting process thanks to financial tools and processes that are not user-friendly and are inscrutable to anyone outside of the finance team.
Excluding the coalface of your organisation from planning and budgeting leads to two outcomes. First, the valuable coalface insight is not adequately captured on an ongoing basis, so can’t be considered during strategic decision-making and prioritisation discussions. Second, the managers who are expected to carry out decisions, and apply the budget in real life, are disenfranchised from the process of creating that budget. Presented with numbers that bear little to no resemblance to their daily business reality, they are unlikely to be motivated to implement the budget.
On the other hand, reconsidering the processes, procedures and tools – specifically new cloud-based technologies that are accessible for non-financial managers – used during the budgeting and planning process can foster transparency and two-way communication with the rest of your organisation. This will help the budget process run faster and more smoothly, plus loop real-time insights from the coalface into your planning and decision-making, and build accountability and ownership among the people who will implement your budgets.
So yes, I would suggest budgets and forecasts remain an essential corporate performance management tool. But to remain relevant and useful today they need to be carried out more frequently and more flexibly in an uncertain world. Fortunately, the processes and tools that enable this also unlock greater efficiencies and competitive advantages to take companies into their next stage of growth, despite this uncertainty.
In Phillips’ next article, the third in this series, he argues that our “next normal” is likely to continue to be uncertain and chaotic.
As published in Business Brief - June/July 2022