In the last blog post I defined a rolling forecast and demonstrated how it could be used to improve an organization’s decision making process to allow it to become more nimble and agile. I also rose the question of what should be done with the annual budget. I’d like to take a moment now to provide my thoughts on why the annual budget remains a valuable management tool and why organizations should not be too quick to abandon it.
Much has been written and said on what is wrong with the budget in its current form at most organizations. In summary, the budget:
The bible on budgeting was written almost 90 years ago by the founder of the consulting firm McKinsey & Co, James O. McKinsey. He articulated very clearly how a budget should be created and the value that the budget offers an organization. Though much has changed, many of these values are still applicable today including:
Instead of taking this approach, I recommend that a rolling forecast be used to supplement the annual budgeting process. A rolling forecast, by its very design, is much more nimble and allows for an organization to make decisions and create plans very rapidly. It addresses the core issues and criticisms of the annual budget by being created and managed at a higher level, allows for underlying assumptions to be updated, focuses on the core business drivers and forces an organization to continually plan forward and not to the end of the fiscal or calendar year. In short, the rolling forecast and annual budget when used together effectively, can allow an organization to create accurate long term plans as well as focus on short term execution simultaneously. In today’s rapidly changing world, both skills are critical to ensure success.