Facing ever-accelerating technological change and capital markets, and even entire national economies that can seemingly turn on a dime, CFOs are finding that fast financial forecasting updates are a more effective planning tool than annual budgets have long been.
Of course, yearly budgets are by no means a thing of the past. In preparing for them, finance chiefs must gain in-depth knowledge of their companies’ assets and do some hard thinking about strategy. And budgeting provides CFOs with the opportunity to interact with line managers to fine-tune corporate goals.
But hidebound, inelastic budgeting may not be as significant as it once was. Increasingly, it’s being put aside for a more forward-looking mindset. “The forecasting process has become more important than budgeting because the world is changing so quickly and therefore your business is changing so quickly,” says John Orlando, CFO of Centage, a budgeting and planning software firm.
You would, of course, expect that to be the case when a technology company moves to the cloud, as Centage, a budgeting and planning software provider, has found. A longstanding family-owned, on-premises vendor, the firm has been moving its technology to the cloud for the last two years and enjoyed a $13.5 million private equity capital infusion earlier this year.
In short, Orlando has found himself needing to make capital allocation decisions at a much quicker clip these days. True, traditional budgeting gives the finance chief a handle on the firm’s long-term strategy. “We prepare a forecast every month, and we roll in the actuals on a monthly basis,” he says.
At smaller operations, CFOs like Max Rule of Hames may have the need and capability to make predictions even more quickly. Located in Sitka, Alaska, an island city accessible from the mainland only by plane or boat, the grocery and convenience store retailer has five stores employing about 130 people. “I actually forecast and manage cash flow on a weekly basis,” says Rule. “And I do that via a spreadsheet, the old-school way.”
Rule’s need to be on top of the way cash flow is trending stem from Hames’s status as an S corporation, meaning that its profits and losses are passed through to its owners, who are required to then report their shares of the results on their personal tax returns. “I’m very sensitive to cash flow, obviously for the demands on it from shareholders” to fulfill their tax and company-funding obligations and to anticipate what their earnings distributions will be, according to the finance chief.
In terms of the earnings of the company, which reports to its owners and bankers on a calendar-year basis, “I don’t get too excited about forecasting … until I get six months of operations information in,” Rule says. (The company doesn’t publicly report earnings.)
Based on the operations information, the CFO will create another version of Hames’s current budget if his forecast for the next five to seven months predicts “major variances” from current sales and cost figures. “That said, I’m typically able to manage the budget and don’t have to do a lot of versioning off that,” he says. “I’ve got a pretty good handle on what earnings are looking like and know what the variables are.”
Sometimes, however, finance chiefs focus their forecast on major risks that may loom on a much longer-term basis. That’s the case for Jim Crowder, the CFO of HHHunt Corp., a real estate developer in a number of Southern states with revenue of about $350 million a year. Since the 2008 recession, the firm has incorporated its estimate of when the next major downturn will come into its forecasting model.
Right now, HHHunt has built into its planning that dire macroeconomic straits will begin in 2020. “We try to read the tea leaves and listen to a lot of economists, and there’s a lot of research that goes into it — and a lot of debate. But we think not including it in our planning paints too rosy a picture,” Crowder explains.
“We want to plan in our cash flow and project development for a recession because not everything goes smoothly,” the CFO says.