Integrating rolling and continuous budgeting
with the Strategy
"The budget is a tool of repression, rather
than innovation"
Bob Lutz, ex-CEO Chrysler
The challenge...
Increasingly businesses are waking up to the fact that traditional,
annual budgeting can constrain, as much as it controls and
plans. No-one is saying, "Ignore the money".
However, it is a tool designed for centralised planning over
relatively long and stable periods. our forecast before even month 1 starts becomes our target for the next 12 months
If you operate in a relatively stable economic environment, then that works. However, if as many people find, you are operating in economically unpredictable environment, or one that is subject to fluctuations and change, then you need a different solution.
"Only 60% of organisations link their
budgets and strategy"
Many organisations have tried to set themselves free from
the annual business planning process. They have moved to a more realistic, iterative planning process. Similar to our strategic learning process. However, they have been brought
back to an annual cycle by the budgeting process which has constrained their desire to be more flexible.
The budget "conception and documentation" problem: Where are the assumptions?
Imagine for a moment arriving to take over a new department. There is no handover, but you are given the budget. Looking at that budget, how would you
know how this was deduced?
Just think for a moment what happens when a budget is constructed.
To construct that budget, you have to have in your head the
strategy. Someone is saying, "This part of the
strategy means this investment, over this period, to achieve
this change, with operational costs and revenue."
Then, it becomes subject to negotiation, horse-trading and
some centralised (sometimes seemingly arbitrary) decision
making.
What comes out is often a single dimensional view of the
strategy. It will be expressed as numbers with the assumptions
hopefully documented. Sometimes, however, the assumptions
are implicit. When someone receives the budget, they
either understand the strategy well enough to know what assumptions
were made, and how they link to the strategy, or they have
to deduce them.
We find that using a strategy map and other fourth generation balanced scorecard techniques help our clients capture and explain the budgets far better.
The "Forecasts equals targets" problem
One problem is that people are set up to achieve fixed targets
by fixed dates. However, the world evolves. Again, let
us be clear. We are not advocating having no performance
management. What we are saying is that performance improvement
is often more relative than absolute. The targets change,
but when they don't, you get game playing.
When the assumptions behind the budgeting, especially those associated with the external environment, are clear, then it is far easier to understand how the budget flexes as the assumptions change. Again this is where rolling or continuous budgets meet the easily refined and updated strategy map approach.
Linking rolling budgets and strategy maps in fourth generation balanced scorecards
If we are moving towards a strategy that evolves as you learn from it and where you can update the strategy maps and scorecards as it evolves, how can we also maintain the relationship with the budget? This is a really important question. If the strategy is being refined and the budgets stay the same then management is asking the organisation to do something different with the existing resources, i.e. those that were allocated on the basis of previous assumptions. This is a constraint you do not want.
It is for this reason that rolling or continuous budgets have been introduced. Rolling budgets provide a six to nine month forecast of the budget in detail, followed by a less detailed budget that extends perhaps to 18 months or two years. This rolling budget is revised every month, bi-monthly or every quarter as information comes in, based upon the latest information about sales, operations, prices, performance and the strategy.
The advantage of this is that the budget process does not try to predict in detail everything for a long way out. Nor does it only do a budgeting process once a year: A process that is often lengthy and time consuming. Rather it predicts the detail short term, less detail longer term, and refines this prediction as the information evolves. Effort involved in budgeting in more evenly spread through the year and requires less crystal ball gazing. It also means that the budgets are more realistic in the period that would normally be characterised by 11 month old predictions.
If the environment or the strategy changes, the strategy maps and their scorecards are far easier to update than a thick written strategic plan. The strategy map and/or its balanced scorecard can be refined and the budgets updated with the consequential changes. This way strategic thinking, learning, testing and refinement becomes a continuous process that is unhindered by budgetary process constraints. The strategy maps and balanced scorecards are updated consistently with the budgets. Any changes can be communicated easily, together.
This is what we have been helping our clients achieve. Its not simple. It requires some changes to beliefs about how budgeting and planning operate. It leaves the integrity of the budgeting process intact, but provides greater flexibility in planning and revision of those plans.
Do you want to:
- Introduce rolling budgets? Having a budgeting that supports the strategy is a great
starting place. But having a budget that can develop
and evolve as the strategy develops is just as important.
You wouldn't want to be at the end of the year and then
find out that someone had failed to execute part of the
strategy because they were budget constrained.
Keep with your existing chart of accounts? Or are you simply stuck with an existing chart of accounts that
does not reflect the joined-up nature of the organisation.
Changing that chart of accounts is a massive job: making the
links from the strategy to the existing chart is not.
We have helped many clients keep their existing structure, yet
provide a more useful view of their costs.
-
Have more responsive staff, with - more flexible incentive?.
Do you want to move away from fixed-term performance management
and appraisals to a more flexible approach?
-
Be clear about the cost of change? Our
methodology is extremely powerful at teasing out the operational
costs from the costs of change. In its first application
over 7 years ago we identified that the organisation's IT costs
were actually £45m rather than the £21m they were
understood to be. Also, we were able to make clear the
true operational and change costs. This led to a highly
flexible and responsive model for anticipating the change in
IT costs driven by different business strategy decisions that
later fed into the change programme.
Are you are bogged down? Can't easily link budgets
to the scorecard? Not clear how you are to refine your
budgeting to be more flexible? Are you missing an opportunity
to improve the way you think, work and perform....
Further information on rolling and continuous budgets
or for an informal conversation, simply talk to us.
We have a variety of case studies, experience and
examples of where we have helped organisations become more flexible
in their budgeting and so turn into action and results.
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