Rolling Budgets, with a Twist

From his office in Valley Forge, Pennsylvania, Bruce Borquist uses the Internet to collect daily budget changes tied to hyperinflation in El Salvador, on-again, off-again irrigation projects in the Democratic Republic of the Congo, and hospital reconstruction in Nepal. Borquist, the CFO of International Ministries, sings the praises of his Web-based budgeting and planning (B&P) software that allows 70 area directors in 23 countries to work with real-time budget information.

But Borquist doesn't have much interest in a full-scale, six-quarter rolling budget. Neither does Rose Melillo, financial systems manager at manufacturer Murray Inc., or Todd Richardson, budget manager at Mercy Health Partners of Western Ohio, or David Foley, senior director of financial planning at 24 Hour Fitness.

Even Erin Lavelle — who cut her B&P teeth at GE Capital, where three different real-time budgets ran at once — doesn't think the process is right for her new company, privately held Mesirow Financial. Lavelle, the vice president of planning and analysis at the financial services firm, now uses a modified rolling budget.

For years, corporate users and software vendors have tried to get full-scale rolling budgets… well… rolling. The promise of commingling real-time financial, operational, and economic information is intoxicating, but at many companies, not practical.

Slowly I Turn
Most finance executives don't want to deal with the burden of a rolling B&P process. To truly integrate such systems, management would have to abandon annual budgets — and the compensation schemes that are based on these yearly goals — notes Lawrence Serven of Stamford, Connecticut-based consultancy The Buttonwood Group. Part of the compensation revamp would force executives to embrace the use of key performance indicators (KPI) in concert with financial metrics, in a collaborative effort that would link operations to finance. But fundamental structural changes like these are difficult to implement and time-consuming to adopt.

Most software users find themselves halfway between static, Excel-based B&P and full, dynamic, rolling budgets. But halfway is better than no way: In the modified approach, the software can monitor and direct budget adjustments, helping to cut down on surprises at the end of the year. The software also decentralizes part of the B&P process by moving many responsibilities to front-line managers.

Serven reckons that the modified rolling budget is really the corporate norm. Most companies that begin full-blown rolling B&P projects, he maintains, eventually scale back the technology to fit traditional 12-month planning processes. One big reason, according to Serven's estimates, is that 80 percent of these companies look for quick software fixes, rather than adjusting their processes before turning to technology. Only after software implementation — perhaps years later — do they begin to change their budgeting culture and processes.

The Missionary's Position
"I tried to get out of the business of making micro decisions about the budget," recalls Borquist, who oversees the $16 million budget of International Ministries. Essentially, he pushed B&P responsibilities down to the area directors — Baptist ministers scattered across the globe — by putting Web-based B&P tools from FRx Software in their hands.

Figuratively (and sometimes literally), International Ministries is in the business of teaching people to fish. So the corporate culture is "pretty participatory and decentralized," notes Borquist, who proceeded to get buy-in from front-line managers who build annual budgets and apply for corporate grants. Adds Borquist, "there was a great sigh of relief when I handed the regional directors the new tools."

At Chicago-based Mesirow Financial, Erin Lavelle also favors a hybrid approach. Using tools from SRC Software, the vice president of planning and analysis "constantly reevaluates" budgets and forecasts — offline. By her lights, the level of data she deems necessary is too granular for into a real-time rolling budget, which would be better served by summary information.

Lavelle maintains that she doesn't "really forecast" with the tool; she creates trend analyses to help determine whether business units at the $182 million (in revenue) company are on course. "As soon as you see you've stepped off the budget path," says Lavelle, "you can adjust operations to help you get back on target."

Furthermore, contends that even stepping off the path — as long as you know you've strayed — can suggest new products and opportunities. For example, a downturn in one product line may be an indication that another line is about to develop. By seeing this variance in a monthly update, managers can redeploy people, capital, and raw materials to navigate around the downturn and still meet corporate revenue goals.

Reducing Medical Waste
Like International Ministries, Mercy Health Partners doesn't need a fully dynamic B&P system, says budget manager Richardson, but his FRx software package does help department managers see the relationship between the budget process and operations.

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