FSN Executive Briefing

"BudgetingCould it be a thing of the past?"

FSN Publishing Limited 2013. All rights reserved.

Budgeting Could 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.

Summary

Companies are questioning the value of traditional 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's Finance 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 growth opportunities 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 Poll conducted in the third quarter 2012 by Adaptive Planning and the Business Performance Innovation (BPI) Network2. It illustrated that in order

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, reforecasting 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 optimize the 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.

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 matrixbased 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 a unified performance management environment 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

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's Budgeting and Forecasting Solutions please contact us today.

Bibliography Note1 "Putting your business on the front foot!" PwC Finance 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

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