Finance: “Annual budgets are dead”

Corporate Agility | Finance: “Annual budgets are dead”

October 2012

Ask chief financial officers how they’re coping with economic uncertainty and back comes one near-universal answer: solid balance sheets. The Wall Street Journal reported last year that cash accounted for more than 7 percent of all company assets, the highest level since 1963. As of April 2012, Apple topped the list of cash kings, with nearly $100 billion stashed away. Pfizer was sitting on more than $35 billion; General Motors had nearly $32 billion.

However, available cash is just one of four financial agility levers. Accenture contends that the scenario planning so valuable in both setting strategy and preparing leadership, and the analytics competencies to drive it, as well as variable cost structures are all the more critical in an era of permanent uncertainty.


In this podcast, the authors explore the ways in which leading companies are using financial strategies in today’s volatile business environment as a springboard to high performance. Media Help

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Corporate cash is piling up for several reasons. For a start, CFOs no longer feel that banks are there to help; in fact, they cite example after example of credit lines being cut summarily. One CFO recently told us: “Cash that I control is what I need to be nimble in this environment.”

Besides being there as a bulwark against lean times and market upsets, cash fuels opportunity. Specifically, it enables companies to act promptly on possible acquisitions.

Today’s balance-sheet positions raise the question of whether the “cash bar” has been raised permanently. Business leaders may need to stop thinking of fat cash reserves as an aberration that will be adjusted as soon as the economy returns to “normal.” Those levels may be necessary to be able to manage in a permanently volatile economy. The question yet to be answered: Is this the “new normal” for cash levels?

“What if?”
Finance executives at the most agile organizations are working hard to improve their ability to manage risk. They are building scenario planning capabilities around the subset of circumstances that they believe are most likely to affect them—everything from a sudden escalation of oil prices to greater price sensitivity from consumers. The “planning” part involves detailed responses to each scenario, complete with clear identification of resources, roles and responsibilities.

Because it is all too easy to tie up too many staff members in such exercises, the most agile leaders concentrate their efforts through dedicated teams. At one leading US energy provider, the number of those involved with scenario planning has dropped from 18 to 10, with a tighter focus on the scenarios that matter most. The result: clearer “what if” scenarios and responses than those originally crafted using a larger, more loosely organized team.

In general, many more companies are changing their planning and forecasting processes to provide greater insight and flexibility. A number are accelerating their planning cycles and favoring rolling quarterly and other short-term forecasts over annual plans.

“Annual budgets are dead,” declared one CFO we talked to. “Ten years ago, we had them, but we spent half the year negotiating and planning. Then we realized we needed to update them after the second quarter. Then during the recession we only made commitments for two quarters. Then we started monthly reviews, then weekly updates. At one point, we were monitoring accounts receivable every day to watch trends. We’ve backed off that a bit, but essentially we have a rolling 15-month forecast now.”

As part of this accelerated pace of review and reporting, the most agile companies are investing more in analysis of trends, anomalies and external market information—and, of course, in the technology tools to handle the information gathering, analysis and reporting.

For instance, by increasing market intelligence and working inside the business units, finance teams are more actively managing working capital for strategic advantage. One recent example: An electronics company in southern Europe has increased market share by offering favorable credit terms to selected distributors that it had determined were financially sound—this at a time when its competitors have been pulling back on credit terms to mitigate their risks.

Finance is also becoming much more sophisticated in assessing enterprise performance—understanding the real costs to serve customers and analyzing pricing behavior to maximize the profit contributions from specific assets or products. These efforts require in-depth, dynamic metrics to support insights and decisions.

Variable cost structures are another characteristic of the agility exemplars. Their finance teams work hard to reduce their committed/fixed capital and augment their discretionary expense and capital budgets. That puts outsourcing squarely in the spotlight. Noted one CFO: “Outsourcing was originally about labor arbitrage, but now it’s about giving us a flexible cost structure.”

Top CFOs consider these four factors to be the agility “starter kit.” They work hard to continually improve the necessary capabilities because they know that agility is more easily described than achieved.


About the authors
Paul A. Boulanger is the managing director of Accenture Finance & Enterprise Performance. He is based in Atlanta.

Scott Brennan leads the Enterprise Performance Management group within Accenture Finance & Enterprise Performance. He is based in Charlotte, North Carolina.

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In this podcast, the authors explore the ways in which leading companies are using financial strategies in today’s volatile business environment as a springboard to high performance.


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Finance: “Annual budgets are dead” | Accenture Outlook 
One way Chief Financial Officers are coping with economic uncertainty is solid balance sheets.  However, available cash is just one of four financial agility levers.
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