While many of us look forward to the holiday season, some are dreading it. Why? Because this is the time of year when they have to do the annual strategic review of their business and establish the budget and goals for the coming year. This should be exciting, but for many it isn’t.
Then vs Now
In the “good old days”, the CEO and CFO would go to lunch and scribble their growth and profitability goals for the upcoming year on the back of a napkin. These days, companies have whole teams that spend months working on the annual strategy/budget and then tie up the executives and other senior leaders for weeks until it is finalized. Back-and-forth, up-and-down, budgets get proposed, reviewed, and revised again and again and again.
In the past 30 years, I’ve seen the costs of this annual exercise increase significantly. But what about the benefits? Are you one of the many companies that find yourself throwing the budget out the window within the first few months of the year?
Root Cause
I’m a big believer in the power of setting goals. When done right, there’s something magic about the way goals/scorecards/accountability help teams to get motivated, to focus and to deliver incredible results.
So why is the annual budgeting exercise viewed as a painful waste of time by so many? I believe the root cause comes down to two things:
- Too Much Data: This problem pops up in 2 places – too much data going in, and too much data coming out! The law of diminishing returns (and negative returns) applies to both circumstances. Too many inputs muddies the picture for the decision makers. Too many outputs muddies the picture for the people who are executing the plan.
- Unpredictable: Change is happening faster and faster, and the world is becoming less and less predictable. As a result, our plans need to become much more nimble and adapt quickly to changing circumstances.
Is 2020 the Straw That Breaks the Camel’s Back?
2020 is the perfect example for why the traditional annual approach needs to be adjusted. Everyone who developed a 2020 plan in 2019 missed the most important factors of 2020 (coronavirus, working from home, Black Lives Matter protests, plummeting oil prices, etc).
If the frequency and horizon of your strategic plans and budgets are still based on the earth’s rotation around the sun and the moon’s rotation around the earth, it’s time to change.
Solution
To win in today’s environment, leaders need to:
- Identify the most important metrics. Focus on the critical few, not the trivial many.
- Study the nature of those metrics. Some metrics might be really important, but there’s not much you can do about them (like the weather, GDP, and interest rates). Some metrics are fairly stable and can be predicted far in advance (like depreciation), while others fluctuate significantly and are impossible to predict too far out into the future (like commodity prices).
- Customize how you approach each metric. Some metrics need to be reviewed more frequently than others. Sometimes it’s worth your time to forecast/budget far into the future, and sometimes forecasting more than a few days out into the future can be a complete waste of time.
For example, your capex budget probably only needs to be reviewed once a quarter and can reliably be forecast several quarters into the future. In contrast, other mission-critical metrics like sales and inventory levels may need to be reviewed daily and shouldn’t be forecast more than a few weeks into the future.
