Despite decades of evidence pointing to greater financial capabilities, business insights and even profitability associated with using rolling forecasts – most companies still rely on the increasingly outdated and static annual budget. Let’s take a look at some of the common obstacles and myths getting in the way.
For the past 30 years, finance experts, executives, and academics have all agreed on one thing: the annual static budget is outdated, time-consuming and even political at times. The most progressive finance and business leaders have become early adopters of rolling forecasts to take advantage of driver-based, agile and smarter business planning.
Yet today, we still find companies have not adopted rolling forecasts on anything resembling a widespread scale. In a previous article – 5 Reasons the Annual Budget is Losing to Rolling Forecasts – we examined the most concrete and results-oriented reasons why top-performing companies have already made the move; but it’s just as important to analyze why others haven’t.
For starters, let’s look first at the top 3 myths perceived to be the most significant barriers to the adoption and implementation of rolling forecasts:
1) Myth: The benefits don’t add up – Logical arguments abound for adopting rolling forecasts, from increased capabilities and insights, to direct impacts on companies’ bottom lines. Aberdeen Group has found that companies with rolling forecasts, compared to those without, report:
- a 43% greater revenue growth over a 24-month period;
- a 46% greater increase in share price over the same period ;
- being 2.4 times more likely even to be able to measure the accuracy of their forecasts.
Like cigarette advertisements, if logic won the day, this point would be moot. Such arguments may be factually valid, but they are missing the critical drivers of decision making: emotions and human nature.
2) Myth: We’re limited by the right technology – Rolling forecasts first came on the radar screen of financial executives roughly 30 years ago, when the Internet, advanced financial software and even Windows were still years away. Today, however, cloud delivery, powerful analytics and seamless integration with source systems are table stakes for any enterprise financial planning and analysis tool. In short, technology today isn’t even remotely a limiting factor.
3) Myth: There’s too big a cultural gap between finance and management – The gap between what finance leaders and management expect from the finance department has been a reality for decades and – in all likelihood – will continue for years to come. Consider how IT has evolved in “Internet time” on the one hand since the early 1990’s, but on the other hand still struggles with management to play a more strategic role in the business than glorified technical support. Such gaps are a fact of life in business, not a barrier to adopting a best practice.
Although we should be able to put these myths to rest by now, it is doubtful we’ll stop hearing about them in the immediate future. Progressive finance leaders would be smart to but these myths behind them and focus on the real barriers to rolling forecast adoption.
To this end, no article about barriers to rolling forecast adoption would be complete without touching on the much more relevant factor of human nature. Resistance to change and taking the path of least resistance are hallmarks of human behavior, and the annual budget is a textbook case study in these phenomena.
“It’s really hard to break a dangerous habit,” says Steve Player, founder of The Player Group and the Beyond Budgeting Round Table, referring to financial professionals’ almost addictive reliance on and familiarity with the annual budget.
Such resistance to change is perhaps best illustrated by the fact that 28% of finance leaders consider their budget obsolete before the fiscal year even starts, according to research from PwC. Yet most companies still rely on it out of familiarity, resistance to change, and an often preconceived notion about the annual budget that, “if it ain’t broke don’t fix it.”
Human nature is a reality of life but – unlike the myths discussed above – there are things financial and business leaders can do to influence and nudge human nature in in the right direction.
In our next article on the topic, we’ll look more closely at the role of the human nature as an obstacle to rolling forecast adoption, and some of the ways to get over it. Stay tuned for more, and please share your insights on the discussion in the comments below.
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