Opinion

Keep financial goals flexible and forecast an accurate budget with real-time software

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

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This was first published in January 2004

 

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