Agile Finance: Rolling Forecasts and Beyond Budgeting Principles

For many organizations, the annual budget is the biggest planning event of the year. It takes months, involves negotiation at every level, and is often out of date within weeks of being approved. Teams that have adopted agile ways of working elsewhere frequently find that the budget cycle pulls them back to fixed annual plans.

Beyond Budgeting is the best-known attempt to rethink this. It is not a software method or a single tool, but a set of leadership and management principles developed by a community of finance and business leaders. Rolling forecasts are one of its most visible practices, although, as its advocates stress, they are not the whole story.

This guide explains the principles, the core idea of separating targets from forecasts, how a rolling forecast works, and how a finance team or small organization can start experimenting.

Where Beyond Budgeting Came From

In a February 2003 Harvard Business Review article titled "Who Needs Budgets?", Jeremy Hope and Robin Fraser, both directors of the Beyond Budgeting Round Table, opened with a provocative claim: "Budgeting, as most corporations practice it, should be abolished." Their argument was that organizations had invested heavily in becoming more flexible, yet the budget and the command-and-control culture it supports still dominated.

Today the Beyond Budgeting Institute publishes the movement's principles. One of its most prominent practitioners is Bjarte Bogsnes. His publisher, Wiley, says he led Beyond Budgeting implementations at two large European companies, Statoil and Borealis, and describes him as chairman of the Beyond Budgeting Roundtable. His book Implementing Beyond Budgeting (second edition) includes a chapter titled "Beyond Budgeting and Agile."

The Twelve Principles

The Beyond Budgeting Institute publishes twelve principles: six about leadership and six about management processes. The leadership principles cover purpose, values, transparency, autonomy, organization and customers. The six management process principles are the ones finance teams feel most directly. In the Institute's words, with the last one lightly paraphrased:

• Targets: "Set directional, ambitious and relative goals; avoid fixed and cascaded targets."
• Forecasts: "Make forecasting a lean and unbiased process; not a rigid and political exercise."
• Resource allocation: "Foster a cost conscious mind-set. Plan and make resources available as needed; not through detailed annual budget allocations."
• Performance evaluation: "Evaluate performance holistically to guide interventions; not based on measurement only and not for rewards only."
• Rewards: "Reward shared success against competition; not against fixed performance contracts."
• Coordination: organize management processes dynamically around business rhythms and events, not around the calendar year only.

Notice that none of these says "never plan." The point is to plan in ways that respond to reality rather than to the calendar.

Separate Targets, Forecasts and Resource Allocation

The most practical idea in Bogsnes's writing is that a traditional budget tries to do three jobs at once. In the first chapter of Implementing Beyond Budgeting, he lists what organizations want from the process: good targets, reliable forecasts, and effective resource allocation. Then he argues that these purposes "do not go well together" and are often in conflict.

His explanation is memorable: "A target is what we want to happen; a forecast is what we think will happen, whether we like what we see or not." When the same number has to serve as both, he writes, the result is likely to be a bad target, a bad forecast, or both.

He describes the familiar games this creates. A sales manager who knows the forecast will come back as a target, perhaps with a bonus attached, has a reason to forecast low. A cost manager who expects any request to be cut has a reason to ask high. Bogsnes stresses that these responses are natural and predictable, and that the process deserves as much blame as the people.

His proposed approach has two steps: first separate the three purposes, then improve each one. Targets can become more ambitious and relative. Forecasts can become honest expectations. Resource decisions can be made closer to when the money is actually needed.

How a Rolling Forecast Works

Bogsnes describes the traditional forecasting rhythm with a car-headlights metaphor. At the start of the year, the forecast lights up four quarters ahead. As the year passes, the visible horizon shrinks until only one quarter remains, then the budget cycle resets it. He calls this an "accordion rhythm" that "seems to assume that the world ends December 31."

A rolling forecast keeps the horizon constant. Each time you update, you look the same distance ahead, for instance five or six quarters, in his example. When one quarter closes, another is added at the far end.

He is equally clear about the purpose of a forecast: "It is not necessarily about being right, but about being ready." The goal is to spot issues early enough to act.

For a hypothetical 40-person services firm, a simple rolling forecast might work like this:

1. Each month, update the forecast for the next six quarters.
2. Forecast at the level of key drivers, such as billable headcount, average rate, utilization and major cost lines, rather than every ledger account.
3. Ask each manager for their honest expectation, and keep it separate from targets and incentives.
4. Compare the forecast with the actual results each quarter and discuss why they differed, as a learning exercise rather than a blame session.
5. Use what the forecast shows, such as a cash dip two quarters out, to trigger decisions now.

Bogsnes also notes that a single fixed horizon is not always best. If business units move at very different paces, other approaches may suit them better.

Don't Stop at the Forecast

Adding a rolling forecast is the easiest change to make, which is exactly why Bogsnes warns against stopping there. He lists "introducing a rolling forecast" alongside other moves he calls symbolic change, and his book's implementation advice includes a section titled "Don't Start with Rolling Forecasting Only."

If targets, incentives and annual allocations stay exactly as they were, the forecast will be pulled back into the same negotiations. The other principles matter too: relative targets, holistic performance evaluation and resources released as needed.

Practical first steps for a finance team that wants to go further might include:

• Approving some spending when a decision is needed, against agreed criteria, instead of pre-allocating it all a year ahead.
• Setting at least some goals relative to peers, prior periods or market conditions rather than as fixed numbers.
• Holding planning conversations on the rhythm each part of the business actually needs, not only once a year.

Constraints to Respect

Many organizations cannot simply drop an annual budget. Boards, lenders, grant makers, public funders and regulators may require one. A nonprofit may need line-item budgets for grant reporting. In those cases, the Beyond Budgeting principles can still shape how the budget is used internally: as one input, not as the only target and the only way to allocate resources. Check any reporting obligations with your accountant or auditor before changing formal processes. For more on planning cycles, see our guide to quarterly planning that stays flexible.

Key takeaways

• Beyond Budgeting offers twelve principles, six for leadership and six for management processes, rather than a fixed method.
• Its central practical idea is to separate targets, forecasts and resource allocation, because one number can't serve all three well.
• A rolling forecast keeps a constant look-ahead horizon and aims to help you be ready, not to be precisely right.
• Keep forecasts unbiased by separating them from targets and rewards.
• A rolling forecast on its own is not enough; the other principles determine whether behavior actually changes.

Sources

• Beyond Budgeting Institute, Our Principles
• Jeremy Hope and Robin Fraser, Who Needs Budgets?, Harvard Business Review (February 2003)
• Bjarte Bogsnes, Implementing Beyond Budgeting, 2nd Edition, Chapter 1 excerpt (Wiley)
• Bjarte Bogsnes, Implementing Beyond Budgeting, 2nd Edition, table of contents (Wiley)
• Wiley, Implementing Beyond Budgeting: Unlocking the Performance Potential, 2nd Edition (book page)