Encouraged by positive results from abandoning the budget, Statoil recently decided to abolish the calendar year as a planning tool and introduce a business- and event-driven management process in its stead.
At American Century Investments, an asset-management firm with $110 billion of assets under management, annual budgets created undesirable behavior, says CFO Jon Zindel. “People would manage to the budget and spend because it was allocated, or not ask for resources, because they were held to coming in at the budgeted numbers,” he explains. “Consequently, if there was a good project to allocate resources to, it would fall through the cracks.”
American Century has moved to a quarterly forecast, in which it undertakes a six-quarter forward-looking view of its business at the end of each quarter. “We then determine whether to add new projects or adjust our plans based on discussions of trends in the industry, regulatory changes coming at us, and competitive or economic issues,” says Zindel. “Resources are allocated based on actual demand, which is constantly monitored.
“We’re a highly adaptive firm now,” adds Zindel. “We’re no longer making a bunch of assumptions in a budget about what will happen, and then being wrong by some factor.”
In Defense of the Budget
Despite the drawbacks of the traditional budget, many companies are not prepared to do without it, even as they adopt rolling forecasts. For them, budgets still serve a purpose. For example, Farbman Group, a full-service commercial real estate organization, has retained its annual budget along with a rolling forecast. The budget is “outdated the minute it’s done, but it still keeps people focused on the end game,” explains Andy Gutman, CFO and treasurer. “Like the old adage says, you can achieve 80% of your goals if you write them down.”
Two years ago, Gutman instituted a 12-month rolling forecast at privately held Farbman Group. Each month he reviews it against the actual numbers reported by the service divisions and each of the properties. “I’m up-to-the-minute on where we are today if some financial crisis were to hit,” he says. “For example, if a major tenant were to go out of business, I could tee up management to raise the rates on some leases or squeeze operating expenses in some area. With a traditional one-year budget, losing 10% of revenue in the middle of the year because of a tenant’s bankruptcy provides no framework to take action.”
Clements International, a global insurance brokerage, also finds that a traditional budget is too regimented to provide the flexibility needed to make quick decisions. “You lose sight of the fact that the strategic view is never revisited during the year,” says CFO Tarun Chopra.
Like Farbman Group, Clements still maintains a budget, which is built from the bottom up with business-unit data, but follows guidelines set at the corporate level. But then, “we do quite a bit of scenario testing, considering things like a commercial contract that may not be renewed in the middle of the year, and then overlay this on the base plan,” says Chopra. “Other scenarios might be the success of our acquisition strategy or a government contract we’re hoping to get and don’t. Even before the year begins, we’ve thought about these issues and planned for them so that if they happen, we know how to adjust accordingly.”