Why Budgeting May Be a Thing of the Past

7/28/2019 Why Budgeting May Be a Thing of the Past

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FSNExecutive Briefing

"BudgetingCould it be a thing ofthe past?"

FSN Publishing Limited 2013. All rights reserved.


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BudgetingCould it be a thing of the past?by Gary Simon

Gary Simon is Group Publisher of FSN Publishing Limited and Managing Editor of FSN Newswire. He is a

graduate of London University, a Fellow of the Institute of Chartered Accountants in England

and Wales and a Fellow of the British Computer Society with more than 27 years experience of

implementing management and financial reporting systems. He is the author of four books, many

product reviews and whitepapers and as a leading authority on the financial systems market is a

popular and independent speaker on market developments. Formerly a partner in Deloitte for more

than 16 years, he has led some of the most complex information management assignments for global

enterprises in the private and public sector.

Companies are questioning the value of traditionalSummary

budgeting

In the face of a Eurozone crisis, global deceleration, Typical budget cycles are

far too long to have much

relevance in today's

fluctuating market

conditions.

Many companies are moving

to rolling forecasts instead.

This can optimize resource

allocation and encourage

performance against

meaningful, flexible goals

that really drive corporate

value.

The transition from

annual budget to rolling

forecast requires careful

change management.

Technology is a key enabler

and the move to Cloud-based

solutions - like those offered

by Adaptive Planning - helps to

facilitate the adoption of

rolling forecasts.

high government indebtedness, widespread austerity

measures, and market uncertainty on an

unprecedented scale, many companies have begun

to question the value of the traditional budget

process. According to PwC'sFinance Effectiveness

Benchmark Study 2012, 80% of participants rely on

the accuracy of their forecasts, but only 45% believe

they're materially correct1. Simply put, typical

budget cycle times, which run to 120 days on

average, are far too long to have much relevance in

today's sharply fluctuating market conditions.

Indeed, most CFOs looking for slender growthopportunities in a wildly gyrating economy want to

monitor the performance of their business even

more regularly and frequently - a view supported by

the results of a quarterly Business Variables and

Volatility Pollconducted in the third quarter 2012 by

Adaptive Planningand the Business Performance

Innovation (BPI) Network2.

It illustrated that in order
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to cope with market volatility, 29 percent of organizations re-planned on a monthly or more

frequent basis in Q3, and 49 percent expected to increase the frequency of re-planning, re-

forecasting and what-if analysis in the fourth quarter. So is there a better way?

The move to rolling forecasts

To remain competitive, to make better informed decisions and to react to market conditions

in a timely manner many companies are moving away from traditional budgeting and

instead turning to rolling forecasts - sometimes called 'continuous' forecasting.

Rolling forecasts - unlike a traditional budget - do not have an abrupt (some would argue

arbitrary) end date coinciding with a financial year end or quarter end. Rather, a rolling

forecast is made for a 'sliding' 12 month period, i.e. as each period is 'actualized', an

additional forecast period is tacked onto the end, so that the forecast always looks out

across a 12 month horizon (although five-quarter rolling forecasts are becoming popular in

some industries)1.

A rolling forecast which is reviewed at least every month has the advantage of being much

more agile and responsive to external and internal environmental changes. It enables

management to gain a clearer insight into where the organization is headed and where

necessary, to reallocate its resources to help keep performance on track.

Optimising resource allocation and combating 'short-termism'

Neal Vorchheimer, senior vice president of finance for North America at Unilever is an

advocate of the rolling forecast, "We used to have what we called the annual plan, and we'd

spend six months of the previous year putting it together. As soon as the budget was

approved it was out of date. So we decided to do away with it." 3

With the greater insight a rolling forecast can provide Neal Vorchheimer is able to optimizethe allocation of resource, the effects of which can have a direct impact on the bottom line.

"You're trying to continually optimize the mix of where you're putting your discretionary

investments," he says. "Previously, the business units were committed to this arbitrary

annual number in the budget and were of the mind-set that they had to stick to it. Now,

every division has a target, and it is our job in finance to continually help them reach it." 3

A rolling forecast can also be an effective tool in combating short term attitudes and actions,

preventing the so called 'diving for the line' syndrome commonplace in the budget process.


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By contrast, rolling forecasts, which provide a continuous assessment of progress,

encourage performance against medium term goals that drive firm value.4

But it would be misleading to suggest that rolling forecasts are a panacea for every business.

It depends, among other factors, on the planning horizon, the nature of the business and

revenue volatility. For example businesses which operate with a long lead time or in a

relatively stable market place such as mineral extraction, utilities, oil exploration and even

vineyards may find little additional benefit to be gained from adopting a rolling forecast.

And even where organizations see the benefit of rolling forecasts some are unable to do

away with budgets altogether, seeing them as key to setting 'aspirational' targets.

Added to which rolling forecasts should not be viewed in a vacuum. In order to leverage the

power of the rolling forecast organizations need to ensure that the plan integrates strategic,

financial and operational aspects of the business, so that initiatives in one functional area

are consistent with projections in another and that satisfying a performance objective in

one place does not have unforeseen consequences in another.

It is also worth bearing in mind that the transition from traditional budget setting to rolling

forecasts usually requires a change of mindset and culture. By definition, rolling forecasts

are crafted in a shorter cycle time and resolving cross functional dependencies in a matrix-

based organization requires a high degree of collaboration. So managing the transition from

annual budget to rolling forecast requires careful change management, especially if the

change affects the basis of remuneration and bonuses.

Deploying Cloud-based solutions

Technology is a key enabler and the move to a Cloud-based paradigm offered by suppliers

such as Adaptive Planning helps to facilitate the adoption of rolling forecasts which require

high levels of collaboration. The ease and cost effectiveness of Cloud deployment coupled

with aunified performance managementenvironment and almost limitless scalability

encourages high levels of user participation as well as the alignment of operational and

financial planning and fewer planning iterations. This has the dual benefit of reducing cycle

times - critical in a rolling forecast - and simultaneously driving up the quality and accuracy of

the forecasts.

All of this leads to higher levels of confidence in the numbers, more time for analysis and

quicker, more effective decision making, so that organizations can eliminate activities which
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do not add value and capitalize on growth opportunities irrespective of market volatility.

With many businesses already taking advantage of rolling forecasts and making the switch

away from traditional budgets to rolling forecasts there is a danger that those who do not

will be left on the sidelines.

If you would like to learn more about Adaptive Planning'sBudgeting and Forecasting

Solutionspleasecontact ustoday.

Bibliography

Note1 "Putting your business on the front foot!" PwCFinance effectiveness benchmark study 2012

Note2 " Business Volatility & Variables: Q3 2012 Survey Results" BPI Network and Adaptive Planning October

2012

Note3 "Let it roll" Russ Banham, CFO Magazine, May 2011

Note4

"Rethinking planning, budgeting and forecasting", Deloitte Consulting November 2011

Disclaimer of Warranty/Limit of Liability

Whilst every attempt has been made to ensure that the information in this document is accurate and

complete some typographical errors or technical inaccuracies may exist. This report is of a general nature and

not intended to be specific to a particular set of circumstances. The publisher and author make no

representations or warranties with respect to the accuracy or completeness of the contents of this whitepaper and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose.

No warranty may be created or extended by sales representatives, or written sales materials. The advice and

strategies contained herein may not be suitable for your situation. You should consult with a professional

where appropriate. FSN Publishing Limited and the author shall not be liable for any loss of profit or any other

commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Why Budgeting May Be a Thing of the Past