Finance of the future will be more forward-looking, analytic, data-driven and advisory. It’s an exciting time to be leading a Finance team. But what are the best ways to position yourself, your team, and your organization for success?
Some leading Finance teams are seeing great results with zero-based budgeting (ZBB). But there are also plenty of Finance leaders loudly extolling the virtues of rolling forecasts.
Which leads to the question: How do you choose between rolling forecasts vs. zero-based budgeting? The data shows that your Finance team may be more successful if your plans for FP&A transformation include both.
According to our global survey of 500 Finance leaders, there’s a clear correlation between ZBB and rolling forecasting — success with one strengthened success with the other.
Let’s review the value of ZBB and rolling forecasts and explain how they are better together — with a bit of help from a couple of fantastic Finance leaders.
What Is Zero-Based Budgeting?
Zero-Based Budgeting is the practice of starting each fiscal year with a blank slate, rather than bringing in numbers from the previous budget. When building out the budget, each department accounts for its needs, down to the line item.
The primary benefit of ZBB is superior accuracy. Budgets are much more likely to be within +/- 5% — and we all know that sometimes small shifts in expenses can mean the difference between a banner year and missing business forecasts.
What Is Rolling Forecasting?
With conventional forecasting, you typically create separate and sequential forecasts. When the period of the forecast is used up, you move on to the next. So, you’ll go from Q1 to Q2 to Q3 and so on.
Rolling forecasting is the practice of extending the period being forecasted as time goes by. In other words, you may have a 12-month forecast, but when you reassess the forecast at month-end, you’ll add another month to the end of the forecast. So a 12-month forecast is continually looking out a year.
This continued assessment and realignment ensure far more accurate forecasts and superior agility to make changes more quickly. And, once the process is rolling (no pun intended), it even reduces the time to forecast.
ZBB + Rolling Forecasts = A Winning Combination
ZBB and rolling forecasts may seem like an odd couple with little in common. ZBB ensures defensible budgets. Rolling forecasts deliver a long view of the business that can be quickly altered based on business and market changes. However, when used together, these techniques provide heightened accuracy, agility and resilience across FP&A processes.
One example from our global survey of Finance leaders: 60% of organizations using ZBB can forecast revenue within 5%, compared to 35% of those who don’t.
“Rolling forecasts have increased in popularity as finance teams are increasingly recognizing the archaic nature of a fixed budget,” says David Chase, CEO and Managing Partner of Ampleo.
Still, many Finance leaders remain hesitant to evolve FP&A processes. “We hold to [static budgets] primarily for compensation and nod toward accountability,” David says. “But a rolling forecast allows for much more agile organizations, and with a little creative thinking, can still be used for compensation and accountability.”
Of course, transforming processes is not as easy as flipping a switch. Evolving FP&A processes requires vision and leadership — something that Finance can provide. Changing the status quo doesn’t start with changing systems and operations — it starts with changing minds.
Janet Schijns, CEO of JS Group, explains: “Finance must first challenge the culture that permits ‘business as usual’ budgeting to exist in their organization when ZBB is available.”
“The culture change is considerable and as such should be the first thing that leadership focuses on,” she said. “Once that is done, they should create a technology plan that eases the burden of both adoption and ongoing processes for the organization.”
How to Tell if ZBB Is Right for Your Organization
While combining ZBB and rolling forecasts can propel companies toward the future of Finance, this power couple may not work for every company. When you propose these process changes, business leaders will likely want to know the return on investment to level up these procedures.
In particular, ZBB can be a bit of a hard sell since it requires significantly more work from people outside of Finance. The process can be time-intensive for departmental leaders who will need to spend time determining how they’ll support the company’s goals — and how much each of these strategies and tactics will cost.
The increased precision you get from ZBB can have a significant payoff for enterprises and larger organizations with budgets that regularly exceed a 5% margin of error. However, smaller organizations with fewer resources may not see as dramatic a benefit.
Get Ready for the Future of Finance
Rolling forecasts and ZBB can transform your finance organization. Together, they can help your team develop the capabilities you need to prepare for the future of Finance. To learn more about key insights about digital transformation in FP&A, visit Transforming Finance: Speed, Agility, Flexibility and Vision.