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Boot the budget? Why rolling forecasts might make more sense

Boot the budget? Why rolling forecasts might make more sense

When it comes to budgeting, accountants should stop presenting the
numbers and letting others analyze what those numbers mean. If
accountants don’t change, warns consultant Steve Player, CPA, CGMA,
they’ll lose relevance and possibly lose jobs.

“It’s our process that’s broken,” Player said. “We’ve got smart
people in finance doing dumb stuff.”

Player, founder of management consulting company The Player Group,
said traditional budgeting processes don’t work and that organizations
must adapt by going to a model of continuous planning and rolling
forecasts. He said several large, successful companies, including
American Express and Unilever, have done away with traditional budgeting.

Traditional budgeting is a broken tool, particularly in a more
volatile business environment, Player said.

“The biggest problem with most traditional budgets is that they’re
based on a bunch of assumptions,” he said. “Assumptions about what the
economy’s going to do, assumptions about future competitive actions,
future customer actions, governmental actions, regulation, currency
movement, a whole series of things, the vast majority of which are
outside the control of the organization.

“And when those assumptions turn out to be wrong, the plans based on
them pretty much are wrong, too,” he said. “Yet, as finance
professionals, we rigidly want to adhere to those plans and do monthly
variance explanations when we’re not inside the line, and we tell
people to get back inside the lines. Well, had we known the storms
that were coming, we never would have drawn the lines there to begin
with. In that respect, finance becomes part of the problem, not part
of the solution.”

The back of the boat

Player likes nautical analogies. He says that if an organization was
a cruise ship, the finance department would be at the back of the boat.

“In most situations, finance is positioned on the stern,” he said.
“We’re sitting on the back, looking at the weight, at the historical
things that have happened. And we’re yelling to the captain, ‘We seem
to be moving this fast, and we may be turning.’ There’s just not a lot
of strategic value you can add from staring off the back of the boat.

“Finance has got to get off the back of the boat and get up on the
bridge, beside the captain, constantly looking forward, looking at
change, what we try to do, and what our options are.”

That’s where forecasting comes in, plotting a course for the future.
“We need to define what this ship’s capabilities will be in five
years,” he said. “That five-year vision has to be very, very flexible
because the environment can change radically, but it still creates the
compass of where we’re trying to go.”

The current model that some finance departments use—offer up data
but no analysis—is a problem the profession must address, Player said.

“In finance, we produce rows and rows of numbers, so much so that it
makes us blind,” he said. “We can throw out a lot of numbers. People
get a lot of comfort in the numbers, but the problem is they don’t
tell a story very well. We put numbers up there, and we don’t know
which ones are important and which ones aren’t. It’s easy to miss
something.

“If we can become trusted advisers to highlight and illuminate the
right things in meaningful ways, there’s a real valuable role for us,”
he said. “By nature, we in the accounting profession say we don’t know
what’s important. And that’s not a real comfortable place to be if a
company’s looking to downsize.”

Finance professionals who are hesitant to let go of traditional
budgeting methods shouldn’t be, Player added. “The message is that
there is a better way to do things, a better way to hold people
accountable, a better way to plan, and a better way to drive
performance,” he said. “They’re not giving up anything; they get
better ways to plan and control.”


Neil Amato (

namato@aicpa.org
) is a JofA senior editor.

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