Why You Should Ditch Your Annual Budget

Why You Should Ditch Your Annual Budget

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It’s simple. Entrepreneurs need to be quick on their feet, able to adapt their businesses to the ebb and flow of an evolving marketplace. Ideally, you want to be able to plan as little as 90 days ahead — and amend your plans along the way.

A really good entrepreneur has plans to respond to wherever the business goes and however fast it gets there. With this in mind, the traditional budget process is not only outdated, but also a bad business practice.

Remember, it was Jack Welch, the former CEO of General Electric, who wrote that budgeting “brings out the most unproductive behaviours in an organisation.” This is even truer today.

Historically, businesses have tied incentive pay to their budgets, creating a conflict of interest among employees who are more committed to hitting a target number than to moving the company forward. It’s a sure way to create a culture of reaching for mediocrity.

On the other hand, rolling forecasts unleash the restrictions imposed by annual budgets.

By establishing goals and priorities in three-, four- or six-month increments, a rolling forecast can provide business owners with a more up-to-date financial picture. In fact, if you truly want to grow and get the most out of your employees, the rolling forecast is essential.

Why? Three key reasons:

  1. It forces people to think proactively about what can go wrong and what can go well.
  2. It doesn’t lock you in, allowing you to remain flexible and adaptive, because the world often changes in ways we do not anticipate.
  3. It keeps everybody focused on how to optimise, rather than hitting a fixed number.

When touting the benefits of the rolling forecast, think of yourself as the captain of an ocean tanker.

You chart a course, factoring in such intangibles as weather and wind. But the reality is that when you sail that ship, those things happen differently. You have to respond to it proactively. The entrepreneur has a plan they’re constantly adjusting.

 

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Oh, by the way, that captain should also rely on something more than a pair of binoculars to scout for rough waters, icebergs, pirates — whatever might be lurking beyond the horizon. The farther ahead you can see trouble brewing, the sooner you can change course accordingly.

That’s why entrepreneurs must include contingencies in their business plans that will allow them to respond to the unforeseen.

  • What if oil prices go berserk?
  • What if weather wreaks havoc on a supply chain?
  • What if your market generates a higher demand for your widgets than you can possibly produce?

That’s your edge as an entrepreneur. If you can think through those things, you can move much quicker than the entrenched competition.

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