Part 4: Beyond Traditional Budgeting

This post is part of my “learning in public” journey as I transition into my role as a finance manager. All concepts and frameworks are attributed to their original creators, primarily David Parmenter and other thought leaders in the field.

The Problem with Traditional Annual Budgets

Most organisations still cling to the annual budgeting process despite mounting evidence of its ineffectiveness. As David Parmenter points out in his book “The Financial Controller and CFO’s Toolkit,” traditional budgets often become outdated shortly after completion due to rapidly changing business conditions.

According to Parmenter (2017), the traditional budgeting process suffers from several fundamental flaws:

  1. Time-consuming and expensive - Finance teams typically spend months preparing budgets that become obsolete within weeks
  2. Based on unsupported assumptions - Many budgets are built on guesswork rather than reliable forecasting techniques
  3. Encourages dysfunctional behaviors - Department managers often engage in “gaming the system,” padding budgets or spending unnecessarily to protect future allocations
  4. Disconnected from strategy - Annual budgets rarely align with the organisation’s strategic objectives
  5. Too rigid for today’s dynamic business environment - Annual budgets lack the flexibility to adapt to rapidly changing market conditions

As Parmenter notes, “Annual planning is a relic of the past and was designed for a stable, predictable business environment that no longer exists.”

The Beyond Budgeting Movement

Jeremy Hope and Robin Fraser pioneered the “Beyond Budgeting” movement that provides a radical alternative to traditional budgeting processes. Their research, documented in “Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap” (2003), identified twelve principles for organisations seeking to move beyond conventional budgeting approaches.

Core Beyond Budgeting Principles

Performance Management Principles:

  1. Set relative goals rather than fixed targets
  2. Reward shared success based on relative performance, not meeting fixed targets
  3. Make planning a continuous and inclusive process
  4. Make resources available as needed, not through annual budget allocations
  5. Coordinate cross-company interactions dynamically, not through annual plans
  6. Base controls on KPIs, trends, and relative indicators, not budget variances

Leadership Principles:

  1. Provide a governance framework based on clear values and boundaries
  2. Create a high-performance climate based on relative success
  3. Delegate decision-making authority to operational managers
  4. Make teams accountable for customer outcomes
  5. Create a transparent information system providing fast, open information
  6. Use performance metrics to promote improvement, not control

Parmenter’s Rolling Forecast Solution

While completely abandoning budgets may be too dramatic a step for many organisations, Parmenter advocates for quarterly rolling forecasts as a practical middle ground. This approach maintains some structure while addressing many of the shortcomings of traditional budgeting.

Key Elements of Quarterly Rolling Forecasts

According to Parmenter (2017), an effective rolling forecast system includes:

  1. Looking out 5-6 quarters - Always maintaining a 12-18 month forward view
  2. Focusing on key drivers - Forecasting 10-12 key business variables rather than detailed line items
  3. Using current business knowledge - Incorporating the latest market intelligence and operational data
  4. Separating targets from forecasts - Ensuring forecasts represent the most likely outcome, not a target
  5. Completing within 5-6 working days - Making the process quick and efficient
  6. Involving the whole management team - Not just a finance exercise

As Parmenter states, “Rolling forecasts should be light-touch forecasts focusing on key drivers that can be prepared quickly.”

Implementation Roadmap: From Traditional to Rolling Forecasts

Transitioning from traditional annual budgeting to rolling forecasts requires careful change management. Here’s a practical roadmap based on Parmenter’s recommendations:

Phase 1: Preparation (3-6 months)

  • Form a cross-functional implementation team
  • Educate senior leadership on the limitations of traditional budgeting
  • Identify key business drivers for forecasting
  • Design a simplified forecasting template
  • Establish a proof of concept with one business unit
  • Document the proposed new process

Phase 2: Implementation (6-12 months)

  • Run traditional budgeting process alongside rolling forecasts
  • Progressively reduce the detail in the annual budget
  • Train finance team and business managers on new processes
  • Implement supporting technology
  • Begin reporting based on forecast variances rather than budget variances
  • Review and refine the process

Phase 3: Optimisation (12+ months)

  • Phase out the traditional annual budget completely
  • Integrate rolling forecasts with strategic planning
  • Adjust performance evaluation and incentive systems
  • Implement continuous improvement of the forecasting process

Overcoming Resistance to Change

Implementing rolling forecasts typically encounters resistance, particularly from those comfortable with the status quo. Parmenter suggests several strategies to address this resistance:

  1. Focus on benefits - Quantify the time savings and improved decision-making
  2. Start with a pilot - Demonstrate success in one department before rolling out company-wide
  3. Secure senior leadership support - Ensure the CFO and CEO champion the change
  4. Train extensively - Invest in developing new skills and capabilities
  5. Communicate constantly - Explain the “why” behind the changes
  6. Make it easier - Ensure new processes are simpler than the old ones

Case Study: A Mid-Size Manufacturing Company

A manufacturing company with $120 million in annual revenue implemented quarterly rolling forecasts based on Parmenter’s methodology. They identified 12 key business drivers, including:

  • Raw material costs for key inputs
  • Production volume by major product line
  • Average selling price by product line
  • Headcount in key departments
  • Energy consumption
  • Exchange rates for major currencies

Their previous annual budgeting process took 12 weeks and produced a 50-page document. After implementing rolling forecasts, they could produce a comprehensive forecast in just 5 days that proved more accurate than their previous annual budget.

The finance team reported spending 70% less time on forecasting activities while providing more valuable information to decision-makers. In the first year alone, they identified $3.2 million in cost-saving opportunities that would have been missed under the traditional budgeting approach.

Integrating with Performance Management

Hope and Fraser emphasise that beyond budgeting isn’t just a financial process change—it represents a fundamental shift in how organisations manage performance.

To fully realise the benefits, organisations should consider:

  1. Separating target-setting from forecasting - Targets should stretch performance, while forecasts should be realistic
  2. Using relative performance measures - Comparing to competitors and past performance rather than fixed targets
  3. Implementing a balanced scorecard approach - As developed by Kaplan and Norton, to ensure financial and non-financial measures are considered
  4. Revising incentive systems - Moving from individual budget-based bonuses to team-based relative performance rewards

Tools and Technology Enablers

The right tools can significantly streamline the rolling forecast process. Options include:

  1. Purpose-built planning software - Solutions like Adaptive Insights, Anaplan, or Prophix
  2. Business intelligence tools - Power BI, Tableau, or QlikView for visualisation
  3. Enhanced spreadsheet models - More sophisticated Excel models with proper controls
  4. Cloud-based collaboration platforms - Enabling distributed teams to collaborate effectively

Self-Assessment: Is Your Organisation Ready?

Rate your organisation on these dimensions from 1 (strongly disagree) to 5 (strongly agree):

  1. Our current budgeting process adds significant value to decision-making
  2. Our budgets remain relevant throughout the year
  3. Our budgeting process takes less than 4 weeks from start to finish
  4. Business managers view budgeting as a valuable exercise rather than a burden
  5. Our budgets support rather than hinder agile decision-making
  6. Our organisation could respond quickly to a major market disruption
  7. We regularly forecast beyond the current financial year
  8. Our forecasts focus on key business drivers rather than detailed line items
  9. Senior leaders would support significant changes to our budgeting process

Scoring:

  • 36-45: You’re already embracing modern budgeting practices
  • 27-35: Good foundation, but room for improvement
  • 18-26: Significant modernisation needed
  • 9-17: Traditional budgeting is likely causing organisational pain

Action Items for Finance Leaders

  1. Document your current budgeting process - Map out steps, timelines, and resource requirements
  2. Identify your key business drivers - What truly moves the needle for your organisation?
  3. Build a simple rolling forecast model - Start with just the key drivers
  4. Experiment with a quarterly forecast - Run it alongside your current process
  5. Measure the time investment - Quantify how much effort goes into budgeting and forecasting
  6. Engage stakeholders - Discuss pain points and potential improvements with business partners

Conclusion

Moving beyond traditional budgeting represents one of the most significant opportunities for modern finance teams to add value to their organisations. By embracing more flexible, forward-looking approaches like rolling forecasts, finance leaders can provide more timely insights while freeing up valuable resources for more strategic activities.

As David Parmenter emphasises, “The annual planning process has been a major barrier to effective performance management.” By adopting the principles outlined in this post, you can begin transforming your finance function from a backwards-looking reporting entity to a forward-looking strategic partner.

References

  • Parmenter, D. (2017). The Financial Controller and CFO’s Toolkit: Lean Practices to Transform Your Finance Team. Wiley.
  • Hope, J., & Fraser, R. (2003). Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Harvard Business School Press.
  • Kaplan, R. S., & Norton, D. P. (1996). The Balanced Scorecard: Translating Strategy into Action. Harvard Business School Press.
  • Player, S. (2009). Managing Through Change: The Power of Rolling Forecasts. IBM Cognos Innovation Center.