In addition to taking a more flexible view of what type of budget suits their companies now, many CFOs are stepping up the frequency of budget revisions and forecasts. “The idea of completing a budget cycle and then putting it to rest and monitoring to that set budget has become fairly passé, based on what we learned in 2009,” says Janice DiPietro, national managing partner, consulting, at executive services firm Tatum. “The world is just changing too fast.”
Player urges CFOs to adopt a rolling forecast that focuses on high-level numbers rather than thousands of individual line items. “One of the problems with budgets is that people try to jam a lot of detail in there. When you’ve got too much to do, it’s best to take a step back and focus on the key drivers. By taking the forecast up a level, you have time to think about the important stuff.”
DiPietro agrees, although she says too few companies have managed to make the switch. “There are organizations that do have a more rolling approach, but it’s not mainstream. And frankly, that is the approach companies need to take,” she says. “The process needs to be more frequent.”
Player also advocates developing numerous scenarios. “If you can’t predict the future, how can you at least be ready for it?” he asks. “You can do that by understanding the different possible futures — by constructing scenarios in a wide range.” While most companies that engage in scenario planning construct three possible outcomes, Player suggests five to seven, including an upside “so good you couldn’t possibly spend all the money you’re making” and a downside “so bad that it threatens the company’s survival.”
Lisa Calise Signori, director of administration and finance for the City of Boston, says she has learned that it’s never too early to start the planning process. In fact, “I would say we are in a perpetual planning cycle,” she says. “There’s no longer such a thing as budget season. It’s year-round planning and year-round adjusting.”
A Team Effort
Engaging employees throughout the company in the budgeting process — and making sure they understand its importance — are also critical steps to creating a more relevant and useful plan, says DiPietro. “You need a commitment from the most senior executives that this is a strategically important thing to do,” she says. “It needs to be more than a financial exercise. If the organization thinks that budgeting and planning is something the CFO makes us do, that’s not going to work.”
Janet Caldwell, finance chief at Kronos Foods, a Chicago-based maker of Greek, Mediterranean, and specialty foods with approximately $100 million in annual sales, says she has been pushing budgeting outside the confines of the finance department in an effort to make the budget more valuable — a tool to truly guide the business rather than an annual ritual led by the finance team and largely forgotten.