Well, the first quarter of 2016 is behind us. Is your 2016 annual budget already obsolete? Probably - and why? Because "stuff happens" and conditions can change quickly in business. That makes it nearly impossible to accurately predict revenues and costs quarters, or even months in advance.
The annual budget has long been the go-to practice of businesses, but it unfortunately presents a lot of disadvantages, particularly for dynamic businesses that need to be able to alter the budget on a whim.
Rolling forecasts can provide a more versatile addition or alternative to annual budgets, enabling businesses to respond quickly to change.
The Disadvantages of the Annual Budget
The annual budget has a lot of limitations, and the larger or more dynamic the business, the less effective annual budgeting will be.
1. Annual budgeting is inaccurate. It's nearly impossible to accurately predict where your business will be or how your resources should be allocated a year down the road. Even the slightest change in the global economy or competitive environment could drastically change the course of your business, and trying to accurately plan out so far in advance is impractical.
2. Annual budgeting is rigid. By creating an annual budget, you are binding your business to a strict spending regimen, without taking into account the potential for fluctuating demand. In doing so, you're needlessly creating a rigidity in your business model that will inhibit your ability to grow.
3. Annual budgets are purely quantitative. Annual budgeting focuses solely on the quantitative nature of business, but there are many other important aspects that the budget will fail to capture. It can be difficult to accurately allocate funds from a purely quantitative framework, since some departments have difficulty quantifying the services they provide. Additionally, it makes it challenging to respond to new demands by the public. Say, for instance, your company needs to improve upon current customer service policies in order to meet the demands of consumers. You'll need to redistribute funds to accommodate this sudden need, which is difficult when operating within the confines of an annual budget.
4. Annual budgeting is time-consuming. An annual budget can be incredibly time-consuming, often requiring numerous iterations to get it right. Particularly if businesses rely on Excel and email, the budget can take months to finalize, while requiring you to pull data from multiple spreadsheets.
Rolling Forecasts Will Help You Stay Ahead
The annual budget has too much rigidity to be able to support the fluctuating nature of fast-growing businesses. As a results, many companies are augmenting their annual budget with a rolling forecast.
With a rolling forecast, your company will be able to revise the budget anytime new information arises or your business takes a new direction. It provides the elasticity that you need to alter your customer service tactics, add new product lines, and adjust funding based on economic trends, so your finances will always be distributed based on the current needs of the business.
A rolling forecast enables you to model a variety of "what-if" scenarios, so you can plan for future circumstances, while responding quickly to present circumstances. It will allow for more business growth by providing an opportunistic approach to finances, since you can periodically revise budget allocations based on current trends.
With cloud-based enterprise performance management (EPM) software, you can easily implement a rolling forecast within your business, allowing you to enhance the accuracy of budget allocations, while improving the efficiency of the budget cycle. With added flexibility, you'll have the agility your business needs to stay on top of trends and maximize on the most current business data.
To learn more, read our Best Practices in Rolling Forecasts white paper.