The annual budget has had its day: keep up with events with a
rolling budget.
You have to question the relevance of the annual budget in today's
business world. Terrorism, globalisation, intense market pressures
across all sectors and the increasing volatility of once stable
Western economies are making a mockery of traditional corporate
financial planning.
Few firms can accurately predict what funds will be required from
one quarter to the next, let alone precisely forecast spending
plans for the next 12 months.
Budgets provide a semblance of financial control to otherwise
jittery corporate stakeholders such as investors, shareholders and
key customers. They work because they encourage the assumption that
if a company can set its budget, it has devised some kind of grand
financial plan based on in-depth analysis of past, present and
planned expenditure. Who would not trust such a company with their
investment or multi-million pound order?
In reality, budgets become meaningless as soon as they are set
because of the impact of events happening in real time across all
economic sectors and national borders.
Business competitors can emerge from anywhere in the world, from
any sector and at any time. Corporate goalposts have to be flexible
to keep the company in play and, in most cases, that is a constant
demand.
The budget process is clearly obsolete - not least because today's
real-time accounting information and reporting systems enable
companies to adapt their financial forecasts on the fly as business
needs change.
Companies are recognising this by moving away from annual budgets
to rolling budgets and sometimes eliminating budgets entirely.
Companies that have modified their budget processes have reported
early benefits of reduced costs, a 30% to 40% saving on budget
cycle times and better management of investor expectations,
according to a study by management consultancy Accenture and the
Cranfield School of Management. The study analysed the planning and
budgeting practices of global firms including DHL, Electrolux,
Ford, AOL Time Warner, Delta Airlines and Microsoft.
The research also highlighted a correlation between companies
modifying their budget processes and stock price performance.
Over 10 years, companies which changed their budget processes
outperformed their peers dramatically, recording average share
price growth of 373% versus 280% for their relevant sectors.
On such evidence, few should mourn the demise of budgeting. In any
case, budgeting has long been regarded as time-consuming and
subject to gamesmanship, as well as being of little predictive
value and is usually out-of-date by the time it is implemented.
The time has come for the annual budget to go the way of the fax
machine - something you still use from time to time, but not a
business-critical tool. Companies that understand this and act on
it stand to greatly en-hance their performance and credibility.
Those that do not should expect to be consigned to history.
Richard Pierce is managing director of PS
Financials