Smart Forecasting vs. Strict Budgets
Entrepreneur.com’s Christopher Hann recently wrote an article, entitled “Why You Should Ditch Your Annual Budget,” in which he encourages companies to implement a rolling forecast. Rolling forecasts function slightly differently than traditional forecasting. Instead of preparing fixed budgets and plans for a year-at-a-glance, a rolling forecast adds another month as every month ends. Businesses are forced to be conscious of their horizon and adapt.
Business is as unpredictable as ever and Hann argues that it is very important for businesses to think on their feet and amend their plans as they go along. Steve Player is the managing director of The Player Group and director of Beyond Budgeting Round Table, two international organizations dedicated to improving the financial planning processes. In an interview with Hann, Player said, “A really good entrepreneur has plans to respond to wherever the business goes and however fast it gets there.” This progressive planning ideology encourages business owners to establish goals and budgets in three-to-six month increments to encourage productivity, proactivity, and market-conscious behavior.
Jack Welch, former CEO of General Electric, says that, “[budgeting] brings out the most unproductive behaviors in an organization.” In a traditional model, companies will find themselves “reaching for mediocrity,” says Player. Additionally, companies offering incentives simply promote hitting target numbers as opposed to moving the company forward. Companies with quotas are simply encouraging quantity over quality.
In summation, Hann’s article encourages the idea that if we look farther ahead, we can see a potential situation and place ourselves in the best position to handle it. If we are well-suited for contingencies, we can more manageably reach our potential success.
Do you agree with the article? Does your company use a rolling forecast? Do you stand firm on your budgets or are you ready for adaptation? How well does your annual budget work for your company? We would love to hear from you.