Challenges with the traditional budgeting process and approaches within Beyond Budgeting
One can really ask why companies mainly plan based on the calendar year. It's not exactly the case that all companies have a natural rhythm that means they start their operations on January 1 and then close down on December 31.
The reason why the majority of all companies plan on a calendar year is probably that the planning work (budget) was linked early on to the external accounting and it must report to the tax authority every year.
But the reporting to the tax authority has nothing to do with a company's business operations.
Recently, some companies have switched to rolling forecasts, which can be perceived as significantly better because you don't get a start and stop behavior. Most people debate whether they should make a rolling 12-month forecast or a rolling 18-month forecast. The analysis does not usually go further than that.
If you think a little outside the box, you can ask yourself what planning horizon the company should have depending on the type of business you have. It feels a little more reasonable. A company that sells soft ice cream may only have a planning horizon of 10 days (depending on the weather). Another company that builds and sells condominiums may have a total planning horizon of 25 years (from land acquisition to sale + 10-year new construction guarantee). None of these companies are served particularly well either by rolling 12 or rolling 18 months.
Make the analysis based on the company's business rhythm. The further into the future we plan, the more uncertain we can perceive the plan to be and then it is reasonable to plan further in time on a more comprehensive level.
Today, there are opportunities to get support in your planning with the help of AI and statistically calculated forecasts. We will write about that in the next blog.
Feel free to get in touch if you have any questions about static vs. dynamic control!
Psst: Did you know that Ekan Management facilitates a network with a focus on dynamic management/beyond budgeting aimed at economists at companies in the Stockholm region? Contact Julia Viklund if you are interested in participating.
Ekan is also Sweden's representative for the international network Beyond Budgeting Round Table (BBRT). Contact us if your company is interested, and we will tell you more about what membership entails.