Annual budgeting and forecasting season has come to pass, along with the all too familiar middle management and executive negotiation tactics. We all know the methods used to create favorable departmental budgets and forecasts:
Departmental managers asking for more than what’s required with the hope of agreeing on the budget that they actually want. Junior managers promising unprecedented results in exchange for executive support and an investment in their new ideas. And of course, the seasoned managers warning of large-scale consequences to the company if a specific budget is cut.
This negotiation process is nothing new to the business world. It’s been going on for decades. But the best run organizations have learned that there’s a much better way to do it; one that completely removes the politics and the poker game from the process.
Many of today’s top finance leaders and teams have done away with the annual corporate budgeting process. Instead, they’re opting for a rolling budgeting and forecasting process to keep a continually updated understanding of the financial state of the company and allocate resources according to new opportunities and market changes that were unforeseen at the beginning of the year.
Eric Zimmerman is one of them. As the FP&A Manager for Infusionsoft, Zimmerman has implemented a rolling forecast system to help the company make course-correcting decisions much faster than ever before, enabling the company to more accurately predict the impact of major changes or key decisions, like the consequences of exiting a particular market. Hortonworks VP of Finance Dan Bradford is another who implemented an 18-month rolling forecast system that has helped the company rapidly scale in parallel with the organization’s tremendous growth.
Steve Player, the seasoned finance expert and Director of the Business Budgeting Roundtable North America, is a well-known advocate of replacing annual corporate budgets with consistent rolling forecasts.
“There are far better ways to plan and control the organization than the annual budget process,” Player said while hosting a recent financial planning webinar. “You wind up in a game of negotiation where budgeting is an exercise in liars’ poker. Nobody is transparent. They’re just trying to negotiate the best position, which destroys the ethical foundation of the organization.”
The goal of a rolling forecast system is two-fold. First, there’s maintaining that ethical foundation by untying compensation to reaching budgets, steering clear of using annual budgets to control costs, and avoiding multiple extended negotiation meetings and several iterations of budgets that are likely to be out of date by the time they’re completed.
The second? Improved decision-making. A true rolling forecast system helps an organization to maintain an updated and holistic view of corporate performance. That means stakeholders and decision-makers are equipped with the information needed to reallocated and redistribute resources to fully capitalize on the most impactful market opportunities.