Every CFO, bar none, will tell you his or her job is to predict the future. How many widgets can we expect to sell over the next 12 to 24 months? How much will it cost to produce them? Will our interest rates and energy costs go up? Will we face additional tariffs? Is there a surprise competitor out there waiting to upset the market? Will a new administration come in with a new tax plan?
Creating an accurate budget means knowing precise answers to all of these questions, but how is that even possible? Teams argue endlessly about these assumptions, and CFOs are constantly looking for ways to test them. As the year progresses, the CFO will spend an inordinate amount of time over the 12 months analyzing and explaining how and why those assumptions were wrong.
I was speaking to Steve Player, author of
I found this shocking because in my experience, most finance teams begin their budgeting process in June; August at the latest. This is especially true for teams that just managed to meet their deadlines the year before. When I explained that to Steve, he scoffed. “Busy work,” he told me. “Busy work that will never add a dime of value or an ounce of insight to the organization.”
I’ve been in enough budgeting meetings with finance teams and regional general managers arguing over the next year’s quotas than I care to remember. To Steve’s point, the GM will argue that revenue expectations should be tempered, considering a variety of economic and market factors, while the finance team, fully expecting this conversation, pushes for the highest number possible. The result? A long series of negotiations driving to the lowest acceptable rate of return, which may or may not have any bearing on what the economy and the business will look like over the 12 months that the budget will be in effect.
He’s also a fan of keeping a budget as light on details as possible, which is anathema to many finance teams. A budget that’s rich in precise details will yield precise plans for everyone in the organization. The devil is in the details, right? Wrong, according to Steve. The more detail you add, the more wrong your final budget will be. As proof, he points to the numerous budget transfers organizations process on a regular basis, an activity that is the epitome of useless busy work.
So if he hates detailed budgets, what does he propose instead? Steve advises getting rid of budgets altogether and replacing them with a rolling forecast. After all, if you really believe in budgeting and planning, why not do it continuously? In this view, a forecast is a model of what the company is currently capable of doing because it’s based on how all of its processes are constructed and how the organization is structured. Such a model allows the finance team to predict how various assumptions (e.g., a sales increase with a simultaneous increase in the cost of raw materials) will affect the company’s finances. He also recommends setting a longer forecast horizon of at least six quarters or more, rather than a year, to allow the organization to track its progress to its long-term goals. Forecasting this way should take two weeks max, leaving the CFO plenty of time to respond to emerging risks, plan improvements, or if all is good, hit the beach.
As for budget details, all you really need to focus on are your key drivers. You’d be surprised how much of the 80/20 rule applies to forecasting, meaning your key drivers can be tracked with 20 percent of your efforts, but they will account for the vast majority of what is important, whereas the 80 percent of other accounts will just create busy work that rarely has any impact. The more time and effort you spend on gathering 80 percent of additional information, the less time you’ll have to do actual analysis. And analysis is what your organization needs most from you. You can’t be an active business partner if you are mired in details that turn out to be wrong.
So rather than dedicating your summer to creating a budget that’s bound to be of limited value, move to a rolling forecast, and spend some time recharging. When you return to the office, you’ll be in a better position to serve as the strategic, hands-on partner your company needs.
