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Let It Roll

Why more companies are abandoning budgets in favor of rolling forecasts.

It is a staple of financial advice, regularly offered by everyone from Suze Orman to your parents: if you want to keep your finances on track, make a budget and stick to it. After all, that’s what big companies do, right?

Not necessarily. For a growing number of businesses, that pearl of fiscal wisdom has lost its luster. Some companies have abandoned the exercise altogether: Unilever parted with its annual budget in 2010, with no tears. So did Norton Lilly International. Statoil and American Century Investments have scrapped their budgets; others are expected to follow suit.

Meanwhile, other companies continue to execute a budget but, for the most part, manage the business without it. Instead, they use rolling forecasts, flexible budgets, and event-driven planning.

Call it a sign of the times, literally. “It makes no sense to use a 19th-century tool to manage a 21st-century company in a volatile global economy,” contends Steve Player, an expert on budgeting and planning and the North American program director at the Beyond Budgeting Roundtable, a shared-learning network. New planning processes, he says, are altering the role of the CFO in remarkable ways. “In the old days, the CFO sat in the back of the ship recording what happened. Now, the CFO stands on the bridge looking forward and adjusting for variables.”

Certainly, new ways of budgeting and planning are needed. According to a recent survey of 273 companies by Accenture, only 11% are fully satisfied with their planning capabilities, compared with 17% 2 years ago and 20% 10 years ago. Budgets do provide a level of detail (excruciating detail, some would argue) that can help shape incentive-compensation plans and capital-markets communications, but far too often the end result of what is often an arduous process is simply shelved and forgotten.

That reality was driven home by the recession, which saw many carefully prepared budgets capsized by volatile stock markets, commodity prices, and exchange rates. “More than two-thirds of respondents said their planning accuracy had diminished because of economic volatility,” notes Robert Bergstrom, senior manager of Accenture’s finance and performance-management practice.

More-effective budgeting-and-forecasting abilities are a top priority for CFOs in 2011.

Indeed, these days a budget is practically past its expiration date the moment the ink dries. “We used to have what we called the annual plan, and we’d spend six months of the previous year putting it together,” says Neal Vorchheimer, senior vice president of finance for North America at consumer-products giant Unilever. “As soon as the budget was approved it was out of date. So we decided to do away with it.”

Going with the Flow

In lieu of a traditional budget, Unilever now relies on an eight-quarter rolling forecast. The company, whose parent recorded 2010 revenues of $54 billion, forecast demand for all of 2011 and 2012 in January, while keeping in mind the fact that change is constant.

“We’re using bottom-up forecasting to come up with the best view of the eight quarters on a rolling basis,” says Vorchheimer. “We get inputs from the sales force, supply chain, marketing, and finance that we align with our innovation plan, which is drawn from our conversations with customers. Each month we update that quarter’s forecast based on events that have occurred, such as the recent uptick in oil and other commodity prices, and make changes accordingly.”


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