In just a few weeks, the 2020 budget has become an outdated, worthless reference.

Drawn up with a considerable expenditure of energy at the end of 2019, the 2020 budget is based on assumptions that have already been refuted for the lockdown period and are largely improbable for the period afterwards, since a rapid return to normal seems unrealistic in a context dominated by uncertainty. The 2020 budget has lost all value and rebuilding one in the coming weeks is not conceivable, due to the lack of availability of finance teams and managers, consumed by the management of the crisis and without sufficient visibility on the conditions for resuming activity.

Will we be able to break free of this budget, which is normally considered essential by financial and general management unanimously? For how long? Which processes will be most affected? What palliative measures should be implemented?

An outdated budget that will fail on 5 key processes

Many of the company’s key processes rely on the budget reference and its periodic updates, both as a set of projected financial data and as a business plan that is rolled out throughout the organization. The current impasse raises five major questions, to which finance management must quickly find answers:

  • Assessing the company’s financing needs over a period of 3 to 12 months, in a context where the first priority is to ensure the necessary cash requirements for the company;
  • Financial communication for listed companies for the next two quarters: at the end of March, 43% of CAC 40 and Next 20 companies had already announced the suspension of their guidance, but the next financial results publication deadlines are fast approaching, for the first quarter and the first half of the year;
  • The company’s internal management, and in particular cost control, at a time when it seems crucial to control expenses and implement the savings plans that will be defined. Some companies choose to centralize spending approvals; this is an emergency response that has strong limitations (circumvention, loss of responsibility, bureaucratic burden, etc.) that cannot be applied on a large scale on a long-term basis;
  • The 2020 bonuses: can an unattainable budget remain a relevant reference, in a year when management teams will be heavily called upon to cope with the situation?
  • The 2021 budget: an undertaking that many players are initiating in the spring, a timing that now seems rather pointless, given the need to clarify the rules of the game and the timetable for 2021 beforehand.

A new version of the budget, available in 1 or 2 months: challenge or miracle?

The first instinct is to return as soon as possible to the usual situation, rebuilding as soon as possible a new budget reference to steer the rest of the financial year and put back in place the steering and control processes that seem more crucial than ever; some companies have always planned to start in May according to the usual schedule, in order to have an update of the budget for half-yearly communication.

There are at least 3 objections to this. The first relates to the time needed to have stable economic assumptions: the 2008 crisis led companies to iterate the 2009 budget process several times, in line with changes in the macroeconomic environment. The causes of uncertainty are numerous and strong, and companies do not have time to enter this vicious cycle. The second relates to the unsolvable dilemma between a simplified, less legitimate process and a complete process, an inconceivable loss of energy: while the former alternative seems obvious and will be very effective in small or medium-sized companies, it is rather theoretical in large organisations, where an order to “keep it simple, remain macro” risks being weighed down by multiple uncoordinated variations to cover all managerial levels. The final and strongest objection is the need for an agile and gradual response from the company; adjustment measures are being put in place gradually: immediate measures to secure cash flow, performance plans, staggering of investments, adjustment of supply and sales resources, more structural changes to increase the resilience of the business model, etc. There are many projects to be undertaken and they will be fine-tuned in line with the recovery. This is completely at odds with the idea of setting the detailed objectives for the rest of the year in a new budget.

What if the budget for the year 2020 had to be abandoned for good? What if we had to drastically change the rules of the game?

An innovative response to support the coming months by living without a budget

Instead of trying to re-establish operations that require stability that cannot be expected too soon, finance departments must promote the company’s agility to react to this unprecedented situation by developing three parallel lines of work:

1 – Adapt existing processes and tools to develop forecasts, whose outlook and assumptions will change from day to day. More than a single process responding to multiple objectives (financial communication, treasury, commercial and industrial plans, etc.), it is necessary to accept that different forecasting processes coexist according to the decisions they have to support. More than just a single forecast, it now seems essential to define and quantify different scenarios and to update the assumptions as the situation unfolds. Only companies that are subject to fluctuations in raw material or energy prices have structurally integrated the concept of scenarios into their forecasts. It is time to explore this opportunity more broadly.

2 – Steer entities using operational, concrete and adjustable objectives that reflect the company’s priorities at each time of the year. Focusing on operational indicators, moving beyond the annual timetable, setting shorter or longer deadlines, if necessary. Review the calendar and agenda of business reviews to share these priorities, adjust the resources allocated accordingly and ensure that action plans are in place.

3 – Abandon the system of performance evaluation and determination of bonuses with reference to the budget and propose an alternative that is both more collective and more operational, to ensure that all efforts are properly mobilized on the “right objectives” at every moment of the year.

Even if they seem to make sense, these proposals may appear to be disorganized, risky and inadequate. Let’s take two elements into consideration: the unprecedented situation to be faced and the robustness of these proposals, which have been implemented for many years by companies that have chosen to reconsider their management and forecasting model, from a Beyond Budgeting perspective (see this website for perspectives and feedback). In France, these include major companies such as Schneider Electric, Danone and Michelin.

Will there be a Before and After COVID-19 for the budget?

Implementing new processes, new ways of forecasting, piloting and rewarding performance is essential today in order to move forward and to find and implement the best responses to the economic crisis caused by Covid-19.

What if these new processes were an opportunity to initiate a real change in performance management practices? What if these new approaches, implemented in a hurry, with the means at hand in 2020, were the basis of a model based on the resilience and agility of organizations? Even if the current situation remains exceptional, the era of stability and predictability is behind us and we must face the consequences.