• Strategy
  • CFO.com | US

Rolling Budgets, with a Twist

A full-blown rolling budget isn't practical at many companies. But some finance executives have found that a scaled-back approach suits them just fine.

Budgets also hold managers accountable for predictions, and depending on the corporate culture, that can create boatloads of anxiety, reasons Elizabeth Lake Key CEO of Denver-based consultancy Lake Business Development. Some corporate personalities react to missed targets with cost-cutting, says Key; an extreme would be layoffs. Others seek more creative solutions, such as exploring untapped markets.

The budgeting process is also stymied by the operational perspective of line managers, who see budgeting and planning as an interruption in business, irrelevant to their day-to-day efforts. That’s especially true when the budgeting process is a traditional, command-and-control effort, which eschews practical input from front-line managers in favor of rigid, top-down targets, argues Jeremy Roche, CEO of B&P software provider CODA Group.

His U.S.-based colleague Steve Pugh, CEO of CODA Financials, is struck by the futility of this “stale” management style. For example, when executives feel free to demand a 15 percent revenue increase mapping out how to reach that target, asserts Pugh, the budget might be padded or otherwise “gamed” by each manager before it’s passed down the line. “By the time it gets to the lowest manager,” concludes Pugh, “the 15 percent mandate has grown to 35 percent, and every manager knows it’s padded and an irrelevant target.”

Dazed and Confused

Modifying the budgeting process to give line managers more responsibility can give them more confidence in their targets — but it can also breed confusion about which target they need to hit, says Buttonwood’s Serven.

Even executives who support rolling budgets still expect their line managers to use annual budgets as a benchmark to measure operating performance. But this is rarely communicated properly, notes Serven, who adds that the continuous planning and hyperresponsiveness of rolling budgets often creates a lack of focus.

In fact, one CEO confessed to a major software vendor that he abandoned rolling B&P because his line managers were confounded by which budget targets they were supposed to hit — the static management assumptions laid out in the annual budget or the rolling B&P numbers.

“The [annual] budget is like drawing a line in the sand,” posits Rose Melillo of Murray Inc., the Lawrenceburg, Tennessee-based manufacturer of snowmobiles, lawnmowers, and garden equipment. Four times a month, Melillo uses software from CODA Financials to adjust sales and inventory forecasts, but for the sake of securing loans or lines of credit, for example, “the budget is what [stakeholders] measure you against.” Melillo, who shortened Murray’s six-month budgeting process to six weeks, adds that “we don’t change our goal, we change the way we reach the goal.”

Case in point: Last year, Wal-Mart canceled a major order of Murray minibikes in the middle of the budget cycle, leading Murray to discontinue the line entirely. When management decided to stop production of minibikes, notes Melillo, the company didn’t change the corporate revenue goal — it immediately redirected the revenue loss into another product line. In this case, Murray beefed up its sales and marketing efforts of lawnmowers to an underserved customer — the U.S. armed forces— and reached its annual target.

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