The Demise of Traditional Budgeting
Traditional annual budgeting in today’s economic and competitive environment can no longer be justified.
As soon as the 2-3 month budget process is set, the budget will already be out-dated and paint an incorrect picture of where the organisation is heading for the next 12 months. There is no doubt an annual yardstick should be created, however this should only form part of an ongoing planning process – a rolling forecast. This will allow management to better focus and react to changes in order to meet short and mid-term goals.
While most businesses do re-forecast, it is generally still bound to their existing 12 month annual fixed budget. In reality there are no yearly boundaries, and in today’s fast moving and dynamic environment, the businesses that succeed are the ones that forecast continuously, use up-to-date business drivers, plan collaboratively and do scenario modelling on a regular basis.
Inherent problems with traditional budgeting approaches include the inability to effectively communicate financial expectations as they quickly become out of sync with the strategic plan of the business. Worse still, they often do not promote the right behaviours, as sales and financial targets are deliberately lowered to mask the actual appearance of performance, and budgeted costs are increased to ensure a larger share of the cost allocations.
The Modern Approach
By using advanced budgeting systems (Adaptive, Cognos Express, TM1) and moving away from error prone, manual and inefficient spreadsheets, organisations can significantly modernise the way they budget. They can reduce their planning or budgeting cycles, budget at an aggregated or detailed level (top down/bottom up), conduct rolling forecasts, promote the right behaviours and better align budgeting with strategy through scorecarding.
QMetrix consultants have a wealth of experiencing helping organisations move away from traditional budgeting approaches. All our consultants have prior experience and knowledge working within the office of finance, with a majority holding professional accounting qualifications (CA/CPA). Please get in touch with us here to have an obligation free discussion.