Ensure your budgeting processes are robust, adaptable, and agile

While each organization must decide what works best depending on the nuances of its operations, in this blog we explore why rolling forecasts may make annual budgets defunct.

What is an Annual Budget, and how does it work?

An annual budget is, essentially, a plan for an organization's revenues. The process of forming any budget identifies long-term strategic goals and operational targets, translates them into plans for the year ahead, and optimizes resource allocation to achieve this goal, whilst remaining within a set spending cap.

Typically, these plans are made at a division, segment, category, brand, or regional level. For example, a public sector local authority would probably have budgets for their different product functions, such as education or social care, and then further broken down at a service level and at a regional level for the services they deliver.

The entire annual budgeting process in most organizations takes around 2-3 months. So, if an organization operates on a calendar year basis, budgeting usually happens from September to November of the previous year to be finalized by December.

Why are fixed annual budgets still appropriate?

Today’s business landscape is constantly shifting in many ways that we can’t predict, with recent events as an obvious example.

When the unpredictable occurs, it will almost always put a fixed annual budget at risk, leading to much of the hard work being wasted, and often has to be repeated to accommodate the unpredictable.

Here are some examples that could affect your annual budget:

• Less funding from the government or a reduction in grants
• Energy prices skyrocketing pushing your input costs through the roof
• Regulators passing a new tax law, requiring greater transparency and accountability
• Sudden fluctuations in currency values or exchange rates

With the pace of change increasing by the day, it is no exaggeration to say that your annual budget is outdated the minute it is made.

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How can organizations make budgeting more adaptable?

To adapt, organizations have to develop processes to make the budgeting process more adaptable and agile. A popular method is to schedule budget revisions periodically throughout the year.

This means that each period you revise your budget you can easily adapt as the unpredictable occurs. This creates a much more agile process where budgets can periodically be revised, rather than being completely thrown out. A rolling forecast allows financial teams to respond quickly to changing conditions.

Most organizations have monthly rolling forecasts of 12-36 months, depending upon the nature of the organization. These are bottom-up monthly forecasts with inputs from across divisions and functions that capture the impact of events that occur during the month to ensure maximum agility.

Some actions may include raising prices or allocating discretionary resources such as media budgets to a business segment that sees growth rather than a segment facing hurdles. In the absence of a rolling forecast, business teams would simply stick to the original annual budget and suffer.

Sticking to the prior budget target may demotivate teams. They know the gap is impossible to make up and deliver sub-optimal results in the remainder of the year if adjustments are not made. Holding teams accountable to more dynamic monthly goals set just before the month ensures performance can be monitored more accurately.

Is it time to say goodbye to the traditional static annual budget?

However, despite the apparent limitations of conventional annual budgets, they still serve some purpose.

Your annual budgeting exercise is quite distinct from rolling forecasts in that it is tied to a long-term strategy. Representing where the organization intends to be in the next 5 or 10 years remains an important process that many stakeholders and executives will want to understand.

Whether you are an organization such as a nonprofit, public sector, or professional services firm, this process ensures that your end goal is always front of mind. Operating environments may change, and you will need to respond. This said, long-term budgets and financial plans still must be easy to adapt.

While it is clear that static annual budgets are no longer capable of handling the complexities and pace of today, organizations across the globe have realized that the annual budget remains critical from a strategic and controlling standpoint.

However, it is also true that an annual budget would severely restrict the agility that today's dynamic landscape demands of organizations. So most now follow a hybrid system where annual budgets track their strategic direction, and they supplement this with dynamic rolling forecasts for day-to-day operations.

How can Unit4 FP&A help you make budgeting more dynamic?

Unit4’s FP&A solution sets your teams free to spend more time delivering insights and creating value for your business.

Our integrated financial planning solution helps navigate financial planning and budgeting challenges. You can consolidate data from different sources, shorten planning and budgeting cycles, and adjust plans at short notice.

Notably, Gartner finds that “73% of finance functions have responded to the data boom by promoting greater use of corporate-approved performance data from a centralized finance-governed source.”

Increase the speed and quality of your budgeting process with confidence by bringing all organizational data into an adaptable budget. With significant time savings during budget cycles, this helps you respond to change and uncertainty by simulating scenarios more efficiently.

Take a closer look at Unit4 FP&A today to discover a world of automation, financial planning and analysis, budget management, and financial forecasting with highly interactive dashboards and powerful, pre-configured models. Talk to sales today to learn more.