Here is why you should consider continuous budgets
An article recently featured on CFO.com, written by Jon Louvar, explains why corporate planning on a monthly or quarterly basis instead of annually can improve the accuracy of the numbers and the efficiency of the process.
Continuous budgeting, when the budgeting process is more frequent than once a year, means that business owners and CFOs up their reaction time. The article gives this example:
“Imagine this typical annual budgeting scenario: the product manager prepares his 2013 fiscal year budget in October of 2012, and for Widget A he budgets $10 million for the month of April. However in February the company decides to discontinue Widget A and instead shift demand to Widget B, voiding Widget A’s budget going forward. For finance and budgeting managers, this scenario is a nightmare because it means digging into the settled budget document from months earlier and shifting resources around, reallocating already-determined budgets for March, April and the rest of the fiscal year.”
The continuity of a continuous budget removes some of the rigidity from which other budgets may suffer and allows for quicker reactions to trends in sales or the broader market. For example, departments see the budget as “set in stone” and may spend imprudently at the end of the year because there was room in the budget.
It could also improve transparency around goals and whether or not they will be hit. More attention would be given to month-by-month progress instead of than year-end surprises. Rather than rely on unreliable predictions, the corporate budget can utilize real-time data from the business.
In the article, Jon recommends an enterprise resource planning (ERP) system, but CFOs and business owners can achieve the same kind of real-time forecasts by utilizing a spreadsheet or other financial projection solution. Keep in mind that, while spreadsheet systems benefit from universality, the article points out that they also introduce version-control and formula issues.
The author explains that the most common reason why companies stick with annual budgets is comfort with the existing process. They may see the value in continuous budgets but lack the necessary motivation to proactively change the way things have always been done. If performance goals are tied to the budget, a change to the budget process also introduces risk to pay structure—something most people would like to avoid.
Despite their reticence, the benefits to more real-time and real data in a continuous budget should at least merit managers’ attention.
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