In the words of management guru Peter Drucker, “the greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.”
For a textbook example of acting with yesterday’s logic in Finance, you need look no further than the persistent, almost addictive reliance among most companies on the static, annual budget. This continues today in spite of almost 30 years of financial innovators and prominent business leaders – former GE CEO Jack Welch and Drucker among them – criticizing the budget in favor of driver-based rolling forecasts.
As Gregory Milano and John Cryan of Fortuna Advisors put it in a recent article, The Annual Budget May Be Past Its Useful Life:
“The annual budget may be past its useful life. If most companies stepped back and assessed whether they’re really earning an adequate ROI from their budgeting processes…many companies would curtail their current practices.”
There’s certainly no shortage of logical arguments and expert advice urging companies to make the move to rolling forecasts. So why are companies still hesitant?
Human Nature Gets in the Way
Today’s CFOs often find themselves “ill-equipped to go beyond the numbers and effectively drive organization-wide change,” in large part because they’re met with huge resistance, Deloitte found in their 2010 CFO Signals survey.
Resistance to change is a hallmark of human nature and it’s no different when it comes to rolling forecasts. “It’s hard to break a dangerous habit,” says Steve Player, program director for the Beyond Budgeting Round Table.
As a consequence, many just decide to stick with outdated annual budgets, even though PwC found that 28% of finance executives consider them obsolete before the fiscal year even starts.
That human tendency to revert to the familiar also presents itself in the gap between what finance leaders and management see as the value Finance brings to the overall organization.
“The widening gap between what accountants report and what decision-makers need involves a shift from reporting descriptive historical information to analyzing predictive information, such as budgets and what-if scenarios,” explains Gary Cokins, founder of Analytics-Based Performance Management.
Pointing Human Nature in the Right Direction
Drucker once observed that it takes roughly 35 years for an innovation to gain widespread adoption, but Cokins goes a step further: “attitudes will change as a more analytical generation of managers replaces the existing one, and as accountants begin to think more like engineers.”
In other words, it’s only a matter of time before rolling forecasts become universal. That said, there are steps any company can take to nudge the process in the right direction.
Player suggests that Finance needs to make it clear to management how moving to a rolling forecast doesn’t have to be onerous, time-consuming or disruptive.
Instead, taking it step by step, for example, by using rolling forecasts for specific departments before a company-wide adoption would show immediate value to the organization and paint a real picture of how smooth the adoption can be.
Whether you’re talking rolling forecasts or cloud computing, when human nature catches up with expert opinion and best practices, Finance will finally be able to do away with yesterday’s logic and bring maximum value to the entire organization.
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