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Its Time To Abandon The Budget

Nov 30, 2009

The Need for Driver-Based Continuous Planning

 

Do you know the effects on your company if sales increase by 10%, 20%, etc.?  Do you have the cash to fund the growth?  What happens if a new competitor forces you to cut prices or a key supplier pushes through a significant cost increase?  Especially with the ongoing economic crises all of us have been challenged to develop planning systems that react more quickly than ever before.  Do you have the right tools to respond?  This month I will challenge you to consider tossing out the traditional annual budget and instead move to a dynamic driver-based rolling forecast.

 

Successful companies of all sizes are facing pressures to make planning systems more immediate and responsive. The old way thinking was to sit down with the team in Q4 and come up with next year’s budget.  Once finalized it was set in stone and loaded into the accounting system.  That works fine if your business model is static and predicable. However, old ways of doing business are continuously

challenged by competitors, customers and the ongoing economic crisis.

 

The once a year Uber-process that  produces a one size fits all scenarios budget is on the way out in favor of new approaches such as driver- based continuous planning, a discipline for developing plans and decision making promoted by such organizations as the Beyond Budgeting Round Table and planning gurus like Rob Kugel at Ventana Research.

 

Pulling from the literature, the table below presents the differences between budgeting,

the historical discipline, and driver-based continuous planning, another way of thinking promoted

in this article.

 

Budgeting VS Rolling Forecast

             
   

Budgeting

 

Rolling Forecast

 

Timing

           

Frequency

 

Once/Year

 

Often-Event Driven

 

Cycle Time

 

Months/Weeks

 

Days/Hours/Real Time

Time Horizon

 

Annual

 

Rolling

   

 

 

 

 

 

 

 

             

Process

           

Versioning

 

One size fits all

 

Multiple Scenarios

 

Collaboration

 

Submission/Approval

Real Time Consensus

Deliverables

 

Reports in Binders

Decisions; Actions

 

 

 

 

 

 

 

 

             

Data

           

Type

 

Financial

 

Financial & Operational

Inputs

 

Many direct

 

Activity/Driver based

Measurement

 

Budget Variances

Relative Change

 

Level of detail

 

Precision Driven

 

Relevant; Material

 

 

In contrast to traditional budgeting, driver-based continuous planning or rolling forecasts is all about

scenarios, lots of them. If you can’t predict the future, the next best thing is to set up

scenarios that let you explore how you might behave (or decide) if things are better

or worse or just different. Unlike budgeting where you care about who changed what

number, scenario analysis is about understanding what’s behind the numbers—the

most critical assumptions, volume and rate impacts, and especially what’s driving material

changes to the P&L and cash flow.

 

The deliverable of scenario analysis is actionable knowledge. By analyzing a specific

scenario and comparing it to a baseline case or other scenarios, the management team is

better able to evaluate best courses of action.  Where there is an immediacy to the

issues—e.g. to proceed with a capital project or change pricing—the deliverable is decision

making. Because it’s decision and action focused, robust scenario analysis is the

most critical underpinning of continuous planning.

 

The functionality you need for effective scenario analysis goes beyond simple budget

versioning. Here are criteria to consider:

 

Real time feedback.  when you change a value, all elements of the financial model—the

P&L, balance sheet, cash flow, financial ratios, performance metrics—should update immediately.  For example, with driver-based continuous planning if a volume increase is being contemplated, you will know immediately the effects on revenue, materials, payroll, margins, etc.

           

Maintenance across scenarios.  Rolling forecasts should support adding, modifying and deleting line

items across selected scenarios in a single operation. Calculation and update of financials after structure changes should take only a minute or two, at most.

 

Robust comparison at the line item level.  Budgeting focuses on amounts in accounts. Driver –based continuous planning is about in depth comparison of scenarios and differences in values at any level of detail, especially at the line item level where the most significant inputs and modeling occur. Where the underlying data or links are available, scenario comparisons should reveal variances in

underlying unit activity drivers and rates.

 

Summary

 

Driver-based continuous planning provides companies with a strategic advantage by providing business owners real time actionable information that extends far beyond the capabilities of the traditional budget.             My partners and I are experts at creating driver-based rolling forecasts.  Call me and let’s discuss scrapping your budget and moving to a more strategic and action based system of planning for the future.

.          

 

 

 

Contributions by Rand Heer and Ben Lamorte, Alight LLC.

 

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