Boot the budget? Why rolling forecasts might make more sense

budgetWhen it comes to budgeting, accountants should stop presenting the numbers and letting others analyze what those numbers mean. If accountants don’t change, warns consultant Steve Player, CPA, CGMA, they’ll lose relevance and possibly lose jobs.

“It’s our process that’s broken,” Player said. “We’ve got smart people in finance doing dumb stuff.”

Player, founder of management consulting company The Player Group, says traditional budgeting processes don’t work and that organizations must adapt by going to a model of continuous planning and rolling forecasts. He said several large, successful companies, including American Express and Unilever, have done away with traditional budgeting.

Traditional budgeting is a broken tool, particularly in a more volatile business environment, Player said.

“The biggest problem with most traditional budgets is that they’re based on a bunch of assumptions,” he said. “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 organization.

“And when those assumptions turn out to be wrong, the plans based on them pretty much are wrong, too,” he said. “Yet, as finance professionals, we rigidly want to adhere to those plans and do monthly variance explanations when we’re not inside the line, and we tell people to get back inside the lines. Well, had we known the storms that were coming, we never would have drawn the lines there to begin with. In that respect, finance becomes part of the problem, not part of the solution.”

The back of the boat

Player likes nautical analogies. He says that if an organization was a cruise ship, the finance department would be at the back of the boat.

“In most situations, finance is positioned on the stern,” he said. “We’re sitting on the back, looking at the wake, at the historical things that have happened. And we’re yelling to the captain, ‘we seem to be moving this fast, and we may be turning.’ There’s just not a lot of strategic value you can add from staring off the back of the boat.

“Finance has got to get off the back of the boat and get up on the bridge, beside the captain, constantly looking forward, looking at change, what we try to do and what our options are.”

That’s where forecasting comes in, plotting a course for the future. “We need to define what this ship’s capabilities will be in five years,” he said. “That five-year vision has to be very, very flexible, because the environment can change radically, but it still creates the compass of where we’re trying to go.”

The current model that some finance departments use – offer up data but no analysis – is a problem the profession must address, Player said.

“In finance, we produce rows and rows of numbers, so much so that it makes us blind,” he said. “We can throw out a lot of numbers. People get a lot of comfort in the numbers, but the problem is they don’t tell a story very well. We put numbers up there, and we don’t know which ones are important and which ones aren’t. It’s easy to miss something.

“If we can become trusted advisers to highlight and illuminate the right things in meaningful ways, there’s a real valuable role for us,” he said. “By nature, we in the accounting profession say we don’t know what’s important. And that’s not a real comfortable place to be if a company’s looking to downsize.”

Finance professionals who are hesitant to let go of traditional budgeting methods shouldn’t be, Player added. “The message is that there is a better way to do things, a better way to hold people accountable, a better way to plan and a better way to drive performance,” he said. “They’re not giving up anything; they get better ways to plan and control.”

We at Shindel Rock can assist you in implementing Steve Player’s changes.  Let us know if you’re ready to “Boot the Budget” and move to a rolling forecast model.