Rollover Budgets Every Six Months
– Long-term corporate budgeting is a joke
But uncontrolled variables are what make dreams come true. If we change the way work works we can live the dream of work-life balance and sustainability.
In a Nutshell
Corporate budgeting is like astrology, predicting outcomes with certainty and prescribing ways to deal with events that are yet to materialize. And, managers are often so committed to their own forecasts that they’re willing to do whatever it takes to make them real – often at the cost of the company’s overall profits. In other words, corporate budgeting is that tedious mix of numbers, never-ending meetings and strained deliberations that drains valuable time and incentivizes corporate deceit.
When budgets are drawn based on long-term projections, it introduces into the equation multiple variables that nobody can control. More often than not, managers resort to lying and cheating so that they can set low targets and achieve results that therefore seem tremendous. When every executive approaches the budget with hidden agendas, the situation quickly devolves into people playing against each other. There’s rampant distrust and incentives meant to motivate performance get distorted, often risking the best interests of the company.
Which is why corporate budgeting in most companies is so rife with negativity that’s deeply embedded and the deceit is almost invisible because it’s viewed as being part of the process. It’s a game where cheating wins and honesty loses. But, it needn’t be such a tedious and depressing process: When corporate budgets focus on creating value and reinforcing a growth mindset, the process could be positive and stimulating, encouraging people to be proactive. But to do that, you need to rethink your budgeting process and maybe even turn it on it’s head.
Institute rolling budgets that get updated and extended every six months.
Traditional budgeting that forecasts over long periods of time, like three or five years, is a complete farce. It makes a company’s frontline employees less powerful and confident; it encourages corporate secrecy and bestows only a select few with relevant information. And, it leads to companies dragging their feet when they should have reacted nimbly to changes in the market situation. Companies that roll over budgets semi-annually, on the other hand, use real facts to make decisions that have real impact on the company’s growth and value. They know it’s wasted time and effort to forecast numbers, economic contexts or competitor movements beyond 12 months because those predictions are most likely to change. Instead, they treat the budgeting process as it should be – the first step in their firm’s long foray into the future – and update their numbers and vision according to current market conditions.
Focus budgeting efforts on the here and now: Budgeting need not be a mammoth process that managers and departments slog through once a year. Instead, they can be flexible constructions that focus heavily on the short-term, projecting detailed numbers for a period of just six months and a financial vision for the year. Traditional, long-term budgets might seem more familiar and therefore more palatable, but they’re nothing but speculation and add no real value to the company or the budget. There are so many changes and variables that are beyond budgeters’ control that it’s nothing but a giant drain of executive time and effort. Six-month budgets, that get rolled over and are updated according to current market conditions, tend to bring greater clarity to the annual vision your company has.
Co-create budgets with transparency: Encourage managers and departments to co-create the budget in a participative and transparent way that leaves little room for political games and hidden agendas. It forces people to look beyond covering their bases and protecting their own interests. Assuming a bottom-up approach to budget creation empowers those who are at the frontline of your business. Since they have the greatest knowledge of customer and market sentiments, they are the most qualified to indicate how the company might perform in the next six months. So pay a lot of attention to bottom-up insights and feedback. If the numbers projected thus aren’t ambitious enough to reach the goals set by the leadership, then that indicates trouble for company profits and can impact everyone. Having a transparent discussion that prioritizes benefits to the company as a whole, as against, individual departments, is the most realistic way to build budgets.
During crises, budget with less control: In the face of a crisis, conventional companies place a great deal of pressure on their finance teams to come up with various scenarios and try to exert control. The finance team, after scrambling to get information from the different departments, consolidates the numbers and offers multiple projections that range between optimistic to conservative. To do that, they play with a lot of variables beyond their control and cook up a best case scenario to tell the management. In the end, it’s just a play with numbers that has no real relevance but expends so much energy on things the company cannot control. So, when there’s a crisis, people tend to become rigid with tension and try to control outcomes, whereas in reality, crises are the times when people have the least control because of all the instability. It’s impossible to predict during a crisis how the market or the competitors will behave. So, it’s a lot of illusory control with top-level executives looking out for themselves – their brand or department or their year-end bonuses. Which is why budgeting for the short-term, allows you the flexibility needed during a crisis. It helps the company, as a whole, respond with agility and enables plans to be made on the go.
Don’t manipulate numbers to achieve illusory targets: It’s quite common in large companies for departments to set lower targets, in order to outperform them and get fatter bonuses. For instance, the sales department might lower its target, but the marketing team will automatically step up the pressure on them to justify their projections of higher sales. When managers and departments manipulate numbers to serve their own interests, they are constantly at battle with each other. Nobody’s willing to consider what the most realistic outcomes might be. Or, what might benefit the company the most. Long-term budgets typically leave a wide margin for such speculations and unrealistic discussions about numbers. And the most vociferous or confrontational department tends to win the battle, but the whole company ends up losing. Shorter budgeting periods allow departments to collaborate on a more transparent and constructive level, basing arguments on concrete facts about the market and clients. Done this way, budgets are healthier, have room for follow-ups and consume lesser time and energy. But most importantly, it removes the need for companies to perform tax-time manipulation of numbers to reach the goals and tally financial statements.
Retrospect but don’t carry it forward: When you budget keeping in mind the collective goal, without prioritizing individual interests, there’s no risk of managers doing little tricks at the end of the year to favor their departments. In such a scenario, it becomes easier to accept it even if you weren’t able to reach your goals. Afterall, when you co-create the budget, everyone knows the contexts and realities that prevented you from reaching your targets. It’s a good idea to retrospect and understand why you couldn’t reach your goals; explore how to overcome the situation; and how to avoid it in the future. However, when budgeting for the short-term, you need to start the new year without any backlogs or penalties for targets that weren’t achieved in the previous budget. While it doesn’t help to push unpalatable results under the carpet, it’s equally pointless to carry forward that negativity or damage into the next year. So, it’s better to retrospect in the moment about losses and misalignment of financial expectations, even if it feels more painful, than to hold on to it.
Level to implement
Be flexible and plan detailed budgets that rollover every six months
Co-create the budget, using a bottom-up approach and update it on the go
Be transparent and open while budgeting
During crises, create budgets that are flexible and less controlling
Focus on the collective goals that help the company grow
Retrospect on losses and failures but resolve them right there
Assume a top-down approach to budget construction
Breed distrust and competitiveness amidst departments with information secrecy
Manipulate numbers to achieve illusory targets
Try to exert control by budgeting within strict parameters in a crisis
Carry forward the negativity of losses or failures to the next year
Boosts agility and flexibility
Helps company respond to market changes faster
Improves employee morale and sense of ownership
Long term decisions, like investments, could suffer
Multinational companies with complex organizational structures might find it difficult to consolidate medium-to-long term company visions with short-term budgets
Traditional finance leaders might resist letting go of the perceived control that comes with long-term budgeting.
As with any transition, there might be a temporary period of confusion which will ease up over time.
Jose Violi, who’s been at Semco for over 35 years, recalls a specific year when Semco was receiving a lot of media attention after a year of crisis. The crisis, however, wasn’t restricted to Semco alone for it was a challenging year for all of Brazil. When Semco leaders were getting ready to publish their numbers at the end of the year, they realized that they could manipulate one or another metric to show either a small profit or a small loss. It wasn’t something illegal – instead, it was just another way to present the numbers to the public.
Ricardo Semler discussed with his core team but left the final decision to them. Violi, who was on the core team, proposed that it would be better to show the loss. Everybody was confused and wanted to know why he wanted to do that. Violi responded by saying, “It’s a good way to show that we’re being transparent and that we’re trying to be even more conservative than usual. It sends the message that although everything is fine with Semco, we did face a very challenging year – which is the reality. So let’s show it as it is.”
Ricardo was personally against this view and decision. He preferred to send out a more positive message to the market at that time because Semco was really on the spot back then. Nevertheless, he agreed with the decision that the team took and they published the numbers showing a small loss. Although it was decision that he didn’t agree with at the moment, he conceded a few years later that it was one of the wisest decisions the company made. This anecdote is a great example that illustrates how Semco refrained from manipulating the numbers or playing corporate games. Instead, they were all about transparency, which on the long-term, really paid off and deepened the good image of the company perceived by the market and competitors.