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Increasingly businesses are aware 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. The forecast we made before month one had even started, becomes our fixed target for the next 12 months.  If you operate in a relatively stable economic environment, then that works.

“Rather than being a tool of innovation, the budget is more often a tool of repression.” Bob Lutz, ex-CEO Chrysler

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.

Rolling-budget

When the wind blows you need a rolling budget

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.

Many organisations have tried to set themselves free from the annual business planning 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 of the budgeting process is a single dimensional view of the strategy.

“What comes out of the budgeting process is a single dimensional view of the strategy”

The budget 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 have fixed targets and fixed dates imposed on them. However, the world evolves. Again, let us be clear. We are not advocating having no performance management.

“People have fixed targets and fixed dates imposed on them.”

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 rolling budgets alongside continuous strategic learning, 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.

The advantage of rolling budgets alongside continuous strategic learning, is that the budget process does not try to predict in detail everything for a long way out. Rather, it predicts shorter term and refines those predictions as it gathers more information and learns.

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.

“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.”

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….

This is a part of our Agile Strategic Management approach, complemented by our Fourth Generation Balanced Scorecard Approach.