Barry Cryer tells a story about a finance director walking down the street. The FD is approached by a homeless man. “Excuse me, mate,” says the man, “can you spare me a few quid – I haven’t eaten for two weeks?”
“I see,” says the FD. “And how does that compare with the same period last year?”
Of course no FD would be that heartless, but the joke hides a deeper truth: the fact that most of us think in fixed periods of time, mainly years and months. We end up measuring financial performance by the distinctly non-financial yardstick of how long it takes the earth to revolve around the sun. Yes, that’s how we measure our personal time, but is it necessarily the best way to plan a business?
There has recently been some movement away from the annual forecasting and planning cycle. I work with several businesses that use rolling forecasts and, according to the Chartered Institute of Management Accountants, this is what some 20 percent of businesses do. But what do the other 80 percent do? Fixed annual forecasts, presumably.
The idea of a fixed annual forecast includes the assumption that a year is the ideal planning period, that we can get a good fix on revenues, costs and profits over that period and that we can reasonably predict how external economic, political and social factors will turn out.
Give it more thought and you come to the question: why is a year the ideal planning period? What if we consider a five-quarter planning period instead? This removes the January factor, by which I mean that January (or Q1) shows a marked change from the end of the previous year when a forecast is prepared. Revenues shoot up; costs are under control. In reality, though, most businesses experience less change between December and January than at any other time of the year: staff, customers and suppliers are all off for Christmas.
Yet this goes on happening. Perhaps businesses, like people, make new year’s resolutions and then break them in the same way. However, a business is a continuous process. The last quarter of one year flows into the first quarter of the next. Businesses do not stop and start with a jolt and they will stay the same unless we make changes. But our planning process often suggests otherwise.
If we choose a different planning period, we automatically start to look at the business in a different way. The selected forecasting period need not be longer than a year; we might use a six- or nine-month period if we feel it reflects the nature of the business. A restaurant might have a very different planning cycle from an oil rig builder. But the selection of an appropriate planning period is important.
And this brings me to the next part of the change in the planning process: if we break away from the notion of the annual planning cycle, we can move on to rolling forecasts. Businesses spend time and resources preparing annual forecasts that run from January to December. At the start of the year, they look forward to the next 12 months of activity, but the horizon shrinks as the year progresses. Rolling forecasts enable the business to keep looking up and thinking about the future, rather than focusing inward on a set of assumptions that are all too quickly outdated.
What underpins this idea is that, in uncertain times, the forecasting and planning process needs to be nimble enough both to predict and react to changes in the business environment. A rolling, non-annual forecasting process enables that. If the process is non-annual, this acknowledges that a business is a continuous process and, if it is rolling, that will keep it focused on change and development.
That is not to suggest that a business should be purely reactive or incapable of setting long-term strategic objectives. Rather, it suggests that such a mechanism is the best way of achieving those objectives.
And don’t even start me on why the tax year begins on 6 April…
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