The limitations of traditional annual budgets
I meet finance leaders across Europe who are increasingly frustrated with the limitations of traditional annual budgets and related budgeting processes. They ask me whether adopting a ‘Beyond Budgeting’ approach – that is shifting from conducting traditional annual budgeting to continuously planning and forecasting – would help them achieve better results. If you are frustrated with your budgets and associated processes, the following will intrigue you.
Annual budgets – An ineffective way to measure performance
A consistent criticism shared among finance professionals is that traditional budgets are ineffective at accurately measuring the performance of a company, a department, or an individual. The reason is straightforward: annual budgets are produced only once during a twelve month period so they are unable to accommodate fast moving market conditions. That means that any growth targets based on a budget rooted in out-of-date conditions quickly lose their relevance.
Just consider for a moment if your sales targets and related sales commissions were based on a budget that was out of step with your competitors’ sales efforts. It would be difficult to draw any relevant conclusions from performance or align rewards accordingly. The result would see your sales team either penalized despite their hard work or overcompensated. Either way, you would hinder the motivation of your sales team.
Annual budgets – An ineffective way to anticipate the future
Because annual budgets are constructed once a year, they are also limited in their ability to accurately anticipate the future.
In contrast to working from a single budget, consider for a moment if you were able to conduct rapid forecasts regularly – e.g., monthly, weekly, or daily. You would find yourself with a clearer sense of your company’s performance and a truer indication of your company’s trajectory. Your enhanced insights would help you make more timely decisions that would have a greater impact. The result: you would create a more dynamic business while improving management and control.
Annual budgeting process – An isolated experience
Your company’s success is tied to its ability to be nimble – i.e., anticipating and responding to rapidly changing conditions. Unfortunately, finance professionals from across the globe tell me that their budgeting and planning processes are unable to integrate the different types of data from across locations, departments, and/or business units. That’s a shame because you need to leverage a continuous flow of current data spanning all functions and locations to make the best business decisions.
Once again, consider trying to establish an accurate sales forecast that is disconnected from knowledge about production levels, and the procurement of key raw materials. The resulting lack of insight would dramatically shape marketing efforts, pricing and as a result, gross margin and profitability.
Going beyond budgeting – Taking the first step
Ambitious finance professionals who want to adopt a more forward-looking ‘beyond budgeting’ approach have one predominant concern: whether they can achieve it efficiently. After all, using today’s annual budgeting tools, they imagine that ongoing forecasting translates into more and more time. The good news is that any finance professional can take the first step to go beyond budgeting without incurring timely (or expensive) processes. The starting point is exploring easy-to-use tools that are designed to help finance professionals reduce the limitations that are inherent in building annual budgets. Corporate Performance Management (CPM) tools allow you to optimize your budgeting at a pace that makes sense to you and your business.