In a previous post I discussed the budgeting practices of world-class companies.  In summary, world-class companies look for ways to reduce the time and effort of the annual planning and budgeting cycle, recognizing that a large effort is not efficient for a process that is obsolete soon after it is complete.

In contrast, world-class companies place more effort on continuous planning and forecasting.  Rather than making the planning process a once-a-year event, world-class companies are finding that it is more effective to implement a rolling forecasting cycle, looking out four to six quarters in advance. 

This has multiple benefits.  By implementing a rolling forecast, companies breakdown the artificial construct of a calendar year and look to forecast through the emerging business cycle.  Additionally, the rolling forecast gives companies time to adjust their capital allocation, ensuring that these allocation decisions are based on the most recent market events and opportunities.

One of the challenges I've seen in developing any forecast is understanding the key drivers of expenses.  Too often general or unrealistic assumptions are interwoven into the forecast without any real effort to track down the real drivers.  This has the inevitable and unfortunate result of creating a wide variance between the forecast and actual results.  Not good when you're looking to build confidence with your Board and Wall Street analysts.

By minimizing the effort to create an annual budget and maximizing the focus on continuous planning and forecasting, world-class companies create a mechanism by which they understand the key drivers behind the forecast and are able to respond quickly to new market opportunities through the flexible allocation of capital and human resources.