Performance Management without Traditional Budgeting

Agility in financial planning

by Olivier Fernandez

The economic environment is becoming more and more VUCA - volatile, uncertain, complex, ambiguous. A prominent topic is digitization, which is likely to bring more or less significant changes for all companies, without the nature, direction and speed of the changes being precisely foreseeable, let alone predictable. In order to survive successfully in such an environment, agility is needed, a concept of corporate management that is currently much discussed. Agility means speed, adaptation, flexibility and dynamism. Agile financial planning and steering is also required as part of corporate management. How can this be designed?

Long-term planning: scenarios instead of details

Medium- to long-term financial planning translates corporate strategy into figures. This makes it possible to assess whether the strategy is financially promising or sustainable. The strategy should be based on a clear vision and mission that provides important orientation in the VUCA world. 

However, it is uncertain which path one will take to turn the vision into reality. Too many factors in the environment are unclear and changeable from today's perspective. The further you look into the future, the wider the range of possible developments and their financial implications. 

Financial planning in the sense of agility takes this circumstance into account by mapping this range with various scenarios. For example, different assumptions about market growth or the speed of the digitization process can affect investments in the production infrastructure at different times, which in turn can affect the way in which investments are financed. 

Agility means being aware of the different options, opportunities and risks, knowing that reality will never be exactly one of those options. But it increases the chances of making the right decisions at the right time and knowing their approximate financial impact. I deliberately choose the term "approximate"; it is simply not possible to make a precise prediction. That is why detailed medium-term planning makes no sense. It is better to invest resources in rough planning with scenarios.

Short-term planning: ongoing course correction

While long-term planning is about financially estimating possible alternative paths towards the vision, short-term planning is much more concrete. This is where decisions set the course. But here, too, no matter how hard you try, there is no perfect plan that you can create once and then follow blindly. If one would do this, this would certainly result in many wrong decisions. 

In his book "The Art of the Good Life" author Rolf Dobelli describes the "high skill of correcting" that is needed in life. Life cannot be planned; it is not worth focusing too much on the optimal setup, the one optimal plan. Rather, it is a matter of constantly correcting based on the many unforeseeable events. He uses the analogy of the aircraft, which on its flight to its destination is permanently exposed to unpredictable influences, such as wind or thunderstorms, and must therefore constantly correct its course. 

The same applies to financial planning. Regular forecasts provide a realistic and balanced view of the near future in order to determine whether the company is moving in the right financial direction. Based on this, the plans are continuously adjusted, and decisions are made at the appropriate time. How often and how far one looks into the future depends on the volatility of the environment on the one hand and on the latency period of the decisions to be made on the other. The forecast horizon must reach so far that there is enough time for today’s decisions to have effect. This is the only way to actively influence the future. Since forecasts are used for concrete decisions, for example in production planning, more details are required than in long-term planning. However, I recommend not to forecast more details than what is necessary but keep the cadence of forecasts high. This increases responsiveness and thus agility.

You may have noticed that this article doesn’t mention the budget process as an instrument for financial planning and control. You can find out why traditional budgeting is usually superfluous, even counterproductive, in the other articles in this blog.