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Typical budget cycles are no longer fit for purpose

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Do you look back with nostalgia to a time when the financial year was 365 days long? Twelve months to ponder change and plan new strategies. But these days CFOs are saying that even quarterly budget cycles aren’t frequent enough.

3rd Feb 2021
CEO IDU
Columnist
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Mapping a business financial cycle onto the amount of time it takes for the earth to travel around the sun is, it turns out, one of those axioms that we have recently discovered to be complete fiction. Today it seems that every new morning could bring a new challenge and a potential change in strategy.

Look at the six-week period from the start of December 2020. Around the world, things have turned on a dime countless times. Countries have shifted from having ostensibly open economies and societies to being in second and third lockdowns, often overnight.

This has spelt disaster for some sectors and companies who were already reeling after almost a year of pandemic response, but has also presented opportunities for companies nimble enough to grab them.

Compare this to your budget and planning cycles, which, to a greater or lesser extent are still probably mapped onto our collective annual circumnavigation of the sun. I’m referring to both the cadence at which we carry out our financial years, and also the amount of time it takes to prepare and ready ourselves for these milestones.

Trying to predict what will happen next is a fool’s game

Does it still take you and your organisation a painful few months shuffling around spreadsheets and hand-holding non-financial managers through the process to pull together your budgets each year? But it’s only once a year, you tell yourself every year, so we’ll struggle through.

Today, CFOs are suggesting that that even quarterly budget cycles aren’t frequent enough to adequately react and adjust to the pace of change in the world. These same CFOs have realised that trying to predict what will happen next is a fool’s game. Instead, they are focusing on ramping up their ability to adapt to change, whatever that change is.

To do this, many are moving to a faster budget cadence – sometimes as short as four weeks – and to holding review sessions weekly. Further, once decisions are made, they need the ability to revise budgets overnight after feedback from leadership and the board. This is what these CFOs say will give them and their organisations the flexibility and agility to roll with whatever 2021 throws our way.

Budgets will reflect almost near-time reality and will change in tandem with the world. Further, leadership will have timely and appropriate data with which to do their scenario planning, with the ability to rapidly implement changes back into the budget and operations.

Reversing Parkinson's Law

To have any hope of achieving this, CFOs need to recognise that the typical way of producing budgets is no longer fit for purpose. There is no way the spreadsheet shuffle can support this budget cadence: you’d have to be starting new budgets before finalising previous ones to have any hope of staying on track. And even if you could pull rabbits out of hats and somehow do the impossible, you are now repeating a soul-destroying process four, six or even 12 times a year.

Meanwhile CFOs who have rethought and rebuilt their budgeting and scenario planning approach, and supported this with new processes, procedures and cloud-based technology that is friendly to non-financial managers, are able to turn on the proverbial dime.

They have up-to-date, standardised figures that can easily be rolled up into a single source of truth and be presented to the board at short notice. And then, when assumptions change, strategic decisions are taken, or the world throws another curve ball at us, CFOs and their teams can rework their budgets overnight to present this new reality.

Suddenly your business is back in sync with the world again (well, as far as is possible!), and you can be agile and responsive to changing circumstances, allowing you to take advantage of opportunities and give your customers what they need today, not what they needed last year or even last month.

You’ve baked transparency and two-way communication with the rest of your organisation into your financial processes. Communication is critical during times of uncertainty, and now with the right processes and technology, your people are fully in the loop because they are part of building the loop with the information they provide, the changes and updates they flag, and rapid return of information and direction once decisions have been made.

In a way, the CFOs that have already got this right have reversed Parkinson’s Law. Instead of work expanding to fill the time available for its completion, the time available for the work’s completion has dramatically reduced.

By rethinking the way the work is done, the CFOs are both shrinking how long is needed to do the work, and doing it in a way that is fit for purpose. And have given themselves the space to roll with any change, any time.

Replies (2)

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By tom123
05th Feb 2021 13:24

Surely if a budget has a life of 4 weeks it will never get reported against?

What you are talking about are rolling forecasts.

However, you need to be careful you are not creating busywork of trying to prepare variances of actuals against the many versions of forecasts that will exist covering any one period.

It is probably useful somewhere for someone to manage to take a strategic view, even if on an operational basis you have frequent updates.

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Kevin Philips IDU
By Kevin Phillips
19th Feb 2021 10:24

The key is the review and actioning the changes identified as once off or ongoing and then updating your forecast for the year end. To me the key metric of any company is the financial year any budgeting for that year and revising that to get an updated estimate of where you will be is pivotal for loan finance, cash flow, credit and management purposes. Future measures are now made against the re-forecast numbers allowing a singularity of focus and purpose.

I am not a great fan of rolling forecasts for the very reason you note in your comment, "will they ever get reported on" and you certainly will be "creating busywork" in a roiling environment whilst not working towards the key metric of the financial year end.

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