Why You Should Ditch Your Annual Budget

Q: Why should an entrepreneur use a rolling forecast instead of an annual budget?

A: Entrepreneurs need to be quick on their feet, able to adapt their businesses to the ebb and flow of an evolving marketplace. That basic fact explains why Steve Player has become a champion of the rolling forecast, which enables business owners to plan as little as 90 days ahead--and amend their plans along the way.

"A really good entrepreneur has plans to respond to wherever the business goes and however fast it gets there," says Player, managing director at Dallas-based planning and forecasting consulting firm The Player Group and director at Beyond Budgeting Round Table, an international organization dedicated to improving the financial planning process.

Player believes the traditional budget process is not only outdated, but also a bad business practice. (He reminds us that Jack Welch, the former CEO of General Electric, wrote that budgeting "brings out the most unproductive behaviors in an organization.") Historically, corporations have tied incentive pay to their budgets, Player says, creating a conflict of interest among employees who are more committed to hitting a target number than to moving the company forward. Player calls it "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. Player has seen the benefits for multinationals such as Unilever and American Express, and for entrepreneurs, he considers the rolling forecast essential.

Why? Three key reasons:

• "It forces people to think proactively about what can go wrong and what can go well."
• "It doesn't lock you in, allowing you to remain flexible and adaptive, because the world often turns out different than what we had planned."
• "It keeps everybody focused on how to optimize, rather than hitting a fixed number."

When touting the benefits of the rolling forecast, Player invokes a maritime metaphor. 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 I sail that ship, those things happen differently," he says. "I have to respond to it proactively. The entrepreneur has a plan he's constantly adjusting."

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, Player says, the sooner you can change course accordingly.

That's why he insists entrepreneurs 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 bare-bones startup generates a higher demand for your widgets than you can possibly produce?

"That's the entrepreneur's edge," Player says. "If he can think through those things, he can move much quicker than the entrenched competition."

Like this article? Get this issue right now on iPad, Nook or Kindle Fire.

This article was originally published in the February 2012 print edition of Entrepreneur with the headline: Keep on Rolling.