More companies are set to abandon traditional budgeting systems because new models of financial management give them a competitive advantage in the marketplace, according to new research by a consortium representing some of the world’s biggest companies.
The annual cycle for companies facing rapidly changing markets makes annual plans unsuitable, according to the research which also found that budgets fail to deal with most of the important drivers of shareholder value including intangible assets such as brand and knowledge.
Four of the Big Five firms and blue-chip names such as Boots, Thames Water and Halifax all participated in the Beyond Budgeting Round Table project.
‘We did not undertake this research with the view that budgets are not a good idea but we found that companies not using them are given a competitive advantage,’ said a spokesman for CAMI-I, a not-for-profit organisation that set up the round table and counts Boeing, Kodak and Sony among its members.
Companies that have already revised their need for annual budgets include Ericsson, IKEA and Volvo Cars. These companies share a number of characteristics in their management systems, such as rolling forecasts and challenging costs on the basis of whether they add value, the project found.
Volvo finance vice-president Ole Johannesson said: ‘Budget systems are no longer efficient when the business environment is changing more and more rapidly.’
The company abandoned annual budgets in 1994 in favour of three-month forecasts and monthly reports to the board which include financial information and key performance indicators.
Each quarter, a two-year rolling forecast is updated while there is also a four-year and ten-year strategic plan which is revised annually.
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