Forget the Annual Budget, "Let it Roll"

by Jamie Flinchbaugh on 05-25-11

I’m always perplexed and frustrated by the annual budgeting process. The waste I see it creating, even from outside organizations, is incredibly large. People start planning things financially before they have any idea of what to do. People postpone things that they shouldn’t because it’s not yet in the budget, or spend money they shouldn’t because they have leftover budget. The time spent doing it is a waste in itself, and it ends up being all about the numbers instead of the reasons those are the numbers.

The magazine CFO did a cover-story article titled Let It Roll that discusses the increased adoption of rolling budgets.

My friend Steve Player of the Beyond Budgeting Roundtable helps frame the purpose:

“It makes no sense to use a 19th-century tool to manage a 21st-century company in a volatile global economy,” contends Steve Player, an expert on budgeting and planning and the North American program director at the Beyond Budgeting Roundtable, a shared-learning network. New planning processes, he says, are altering the role of the CFO in remarkable ways. “In the old days, the CFO sat in the back of the ship recording what happened. Now, the CFO stands on the bridge looking forward and adjusting for variables.”

One of the wastes this eliminates is the gamesmanship that goes around managing to the budget, instead of managing to the business needs. Jon Zindel, CFO of American Century Investments, addresses this:

“People would manage to the budget and spend because it was allocated, or not ask for resources, because they were held to coming in at the budgeted numbers,” he explains. “Consequently, if there was a good project to allocate resources to, it would fall through the cracks.”

The biggest benefit of the rolling budget is that conditions change, and things are learned. You want your plans to reflect your most up-to-date knowledge and information. A rolling budget allows that to be incorporated. When done in this way, budgeting as a process can actually be used to drive learning, beyond just accountability. Norton Lilly is doing that:

Last year Norton Lilly adopted a rolling 12-month forecast of revenues and pretax margin goals — the costs that business units must commit to based on anticipated revenues. While business-unit leaders are still held to an annual margin goal, “every unit has to make a certain margin each quarter, which is then combined at the corporate level,” Burton explains. “It is up to them to control their top line and their expenses. Each month they must report to me on their dashboards the assumptions they made about the business, revenue, and costs, and then follow up on related performance — did things play out the way they thought, or has something changed?”

I’m not sure when the annual budget became a process that people thought they couldn’t live without. It’s time to take our businesses back from the budget. Budgets serve the business; businesses don’t serve the budget.

Have you developed new approaches to using your budget as a tool for improving the business? Please share them here.