Improving Flexibility in Budgeting and Forecasting is the Focus for Finance in 2022

A survey of 251 CFOs and other finance leaders revealed that 72% of CFOs will focus on improving the flexibility of budgeting and forecasting in 2022, according to Gartner, Inc.

The next most common focus areas for CFOs in 2022 will be initiatives to reallocate capital based on changing demands (60%) and redefine the employee value proposition in a hybrid environment (58%).

“The pandemic exposed budgeting and forecasting processes that were not able to handle rapid and unpredictable changes in operating conditions,” said Faith Vakil, director of research in the Gartner Finance practice. “Furthermore, it showed that there can be opportunity in disruption and the benefits of flexibility in how an organization uses money throughout a year.”

72% of CFOs said they would have either significant involvement or full ownership of initiatives to improve the flexibility of budgeting and forecasting processes (see chart). The prevalence was lower among all finance leaders (58%).

Survey Responses (Q: What do you anticipate your level of personal involvement will be in improving the flexibility of planning, budgeting, and forecasting processes for your company?)

“The annual budget plan is a convenient starting point but the way an organization uses money throughout the year is far from static,” said Vakil.

“Disruption inevitably forces deviation from the plan, and finance leaders typically look for quick wins: cutting selling, general and administrative expenses (SG&A), and/or moving resources around within a business unit to avoid more difficult tradeoffs between business units.”

The problem with this approach, say Gartner experts, is that the quick wins dry up sooner or later. This forces finance leaders to make the more difficult tradeoffs anyway, often at the most challenging moments for a business.

Instead, it is better to embed flexibility into budgeting and forecasting in a more sustainable way that encourages a total company mindset and can foster innovation and alignment to changing priorities. “The key change in mindset that finance leaders must adopt is to make tradeoffs between business units early and often rather than trying to stick to an annual plan until the last minute,” said Vakil. “This approach encourages collaboration between business units, it embraces innovation as necessary and normal, and improves funding alignment to changing priorities.”

Late tradeoffs are harmful tradeoffs “The long-term consequence of ad hoc tradeoff decisions is to normalize crisis mode and short termism,” said Vakil. “This lengthens the time for companies to recover from a shock and reduces the chances of taking advantage of potential investment opportunities arising from disruption.”

For example, finance leaders may try to freeze travel and expense budgets, and cut marketing spending to avoid having to shift budgets between business units. Then when it becomes clear that these changes won’t be sufficient, with no other quick win options in sight, finance turns to resource tradeoffs between business units. Because this is happening as a last resort, there is rarely the benefit of time for the affected business units to provide input.

To capture the potential value of disruption, finance leaders need to establish processes to know why, and where their budget plan went wrong and then correct it while there is still time within the fiscal year to course correct and reap the benefits of reallocations. Gartner experts recommend a cadenced approach to tradeoffs that embeds the idea of resource flexibility throughout a year rather than it being a last resort measure.

This means cross-functional and business unit resource allocation reviews throughout the year as part of the in-year business review cycles, and for total company performance to be weighted more heavily than individual business unit performance. It also means setting these expectations with functional and business leaders upfront to begin to breakdown internal cultural barriers associated with budget “ownership.”

“This is not the end of budgeting as we know it. Finance will still prepare their annual budget and targets,” said Vakil. “It is simply a shift from using resource tradeoffs as an emergency response tactic to using them as an ongoing tool for budgeting and resource flexibility.”

To learn more, visit gartner.com.