Alternatives to the annual corporate budget

In recent months, companies have been faced with volatile commodity and energy prices, rising borrowing rates and wage inflation. Drawing up an annual budget reflecting the financial health of the structure concerned is no longer enough. Alternative methods, such as rolling forecasts or permanent revisions, are being put forward.

A lack of reliability

Considered an essential step in a company's development, the annual budget is based on a realistic estimate of the company's expenditure and income, enabling it to anticipate its future results. Companies rely on this roadmap, which they follow throughout the year.

More specifically, by drawing up an annual budget, a company must be able to verify the viability, performance and profitability of its project, based on actual and projected figures. This document also gives the company the opportunity to make adjustments to achieve balance or the expected margin. In principle, it is advisable to refer to it every month.

Problem: in the current climate, annual budgets are becoming increasingly unreliable. Indeed, in 2022, markets were more volatile and unpredictable than in the previous year, notably due to the war in Ukraine. Faced with these upheavals, companies are finding it difficult to manage their budgets and set targets.

" Drawing up the 2023 budget was really complicated. And as soon as it was completed, it was already out of date. For this year, I'm going to keep an eye on a few things, and we'll review the budget in five months' time ," Alexandre Saubot, head of the Haulotte Group, told Les Echos newspaper.

Alternative forecasting methods: the example of the rolling forecast

Proposed by McKinsey in the 1950s, budget-based management, although understood by all levels of the corporate hierarchy, now seems ill-adapted to market changes. Companies need more up-to-date and reliable financial forecasts.

New practices are being developed, mainly in the form of rolling budgets. The rolling forecast or "permanent revision" is a budgetary management tool that complements the traditional budgetary approach.

It enables the company to make informed decisions based on two types of forecasts:

  • forecasts for operating indicators (performance),
  • financial forecasts.

Unlike the traditional annual budget, the rolling forecast adapts to any changes the company may encounter (price volatility, unforeseen events...). Laurent Morel, a partner at PwC France and Maghreb, points out in an interview with Les Echos that the use of this method requires a major commitment on the part of business units and the finance department, as well as training for management controllers in each BU in the use of simulation tools.

" Rolling forecasts are for mature companies that have already managed 10 or 15 budgets," he says.