Which Is Right For You?
CEO, Cadilus Inc.
Most would agree these past two years have been unlike anything we’ve experienced before. Consistent, predictable consumer demand has been replaced with dramatic shifts in buying preferences, flooding some product categories with overwhelming demand while seemingly eliminating demand from others. Efficient and optimized “just-in-time” supply chains have been upended, driven by production disruptions, logistical bottlenecks and unexpected demand shifts. Experts generally expect many more months of economic resorting and whipsawing before the business environment returns to a level of pre-Covid stability.
For business leaders trying to navigate such an environment, the traditional methods that seemingly work well in stable environments have fallen short. Nowhere is this more prevalent than the traditional “annual budgeting” process. As business leaders head into another “still stabilizing” year, continuous planning, which has been gaining popularity as a substitute to traditional annual planning, may be something worth considering as a better way to navigate the higher instability and uncertainty that lies ahead.
Before I get into the differences between traditional and continuous business planning, it’s important to highlight the difference between “planning” and “forecasting.” Similar to a square being a rectangle but a rectangle not necessarily being a square, planning is forecasting but forecasting isn’t always planning. In simple terms, the objective of business planning is to align an organization around a road map for execution and accountability. An effective business planning process should do the following:
• Outline what results the organization is committing to deliver in terms of goals and objectives.
• Create a road map of how and when the results are going to be delivered.
• Define who is responsible for delivering the results.
The objective of business forecasting is to provide the most up-to-date translation of information into forward-looking projections to enable the most effective decisions today. An effective business forecasting process should do the following:
• Outline what results the organization believes it’s going to be able to deliver based on the latest information.
• Guide and enhance ongoing decision-making.
• Focus the organization on where special attention is needed.
Business planning outcomes are almost always translated to forward-looking financial budgets. If there’s confidence the business plan can be delivered, it becomes a good forecast. However, with new information continuously becoming available and with new operational decisions being made regularly, the original business plan can become obsolete as a forecast very quickly. Irrespective of the planning process your organization has adopted, “planning” and “forecasting” are essential ingredients. Although there are seemingly endless permutations of business planning philosophies, most organizations have adopted a version of “traditional annual planning.” Although “continuous planning” has been gaining market share, its adoption has been comparatively low. That may be changing rapidly, and you can thank the post-Covid-19 business environment.
With traditional annual planning, how targets are going to be achieved is fully planned up front. This works well in stable organizations competing in mature markets where targets are best achieved through a culture of empowerment and accountability. Here are the components:
• Operational plans and budgets: Operational choices and assumptions are converted into financial budgets, which become the road map for achieving targets. These are set annually and serve as commitments tied to incentives, i.e., “what we are committed to delivering.”
• Monthly forecasts: These are revised operational choices and assumptions to achieve plans based on new information (baseline plus new events) to provide the best possible expectation of future performance, i.e., “what we think is going to happen.”
• Plans and forecasts working together: Monthly forecasts are compared to operating plans to track and highlight areas in need of course corrections.
There are numerous benefits to traditional annual planning. It can foster long-term thinking and decision-making (when annual targets are linked to strategic objectives), empower accountable executives to operate more autonomously within approved budgets, and drive accountability by providing a systematic way to tie accountability and incentives throughout the organization to direct areas of responsibility. There are also organizational costs to traditional annual planning. These include significant time commitments to developing and aligning annual business plans and budgets and rapid obsolescence when the organization is experiencing rapid external and/or internal changes.
By contrast, with continuous planning, how targets are going to be achieved is planned as you go. This works well in rapidly growing and/or changing organizations where targets are best achieved through a culture of agility. Here are the components:
• Targets: Performance goals are established as commitments tied to incentives, i.e., “what we are committed to delivering.”
• Integrated rolling forecasts: Operational choices and assumptions are revised to achieve targets based on new information (baseline plus new events) to provide the best possible expectation of future performance, i.e., “what we think is going to happen.”
The benefits to continuous planning are noticeable. It fosters organizational agility by allowing plans to evolve quickly to match the rate of organizational change and improves stakeholder time efficiency by spreading decision-making, alignment and planning throughout the year as an ongoing process. The organizational costs can be noticeable, as well. There is a risk of short-term thinking and decision-making and reduced stakeholder empowerment due to the continuous need to decide, align and approve new plans.
Which approach is more effective depends on many factors specific to the organization, both internal and external. However, because of continued external instability and uncertainty, there’s no question that more organizations would benefit from continuous planning today than before 2020. If you’re looking for the same planning rigor but more agility, take a look at transitioning to continuous planning. It might be a better way to get you to your long-term goals and objectives.
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