After several turbulent budgeting cycles over the past few years, boards, investors, and senior managers are wondering when (if ever) the fire drills will end. From COVID-19 to hyperinflation, from technological disruption to geopolitical tensions (including, most recently, severe shifts in tariff regimes), the uncertainty has been unrelenting. Traditional approaches to budgeting aren’t keeping up. What was once a straightforward process based on relatively stable EBIT lines and historically predictable consolidating items now sometimes calls to mind Peter Drucker’s corollary to Murphy’s law: “If one thing goes wrong, everything else will, and at the same time.”1
It’s time to reflect on how companies can adapt their budgeting processes quickly (and ideally, preemptively) to navigate tremendous uncertainty. Clearly the world won’t become more predictable. In fact, the changes are likely to come twice as fast. How can next year’s budget—and budgeting processes in the following years—meet the challenge?
The answer lies in continually clarifying the links between budgets and strategy, using detailed data (avoiding blanket approaches to budgeting), and matching the cadence of the budgeting process with real-time business needs. Underlying all three focus areas should be CFOs’ clear commitment to the strategic use of technology to enable and enhance the budgeting process. By paying close attention to these three factors, leaders may gain not only some measure of organizational agility and resilience but also a much better understanding of their budgets and what truly drives business performance.
Budgets should equal strategy
Budgets exist to enable strategy. When conditions change, CFOs need budget processes in place to ensure that value-creating initiatives receive ample resources and that their companies’ strategies remain sufficiently robust. But given the pace at which conditions are changing these days, it can be difficult for CFOs to keep budgets and strategy aligned. CFOs’ initial instincts in times of uncertainty are usually to shelter in place and keep resource allocation essentially the same or to issue incremental cuts across the board to create some short-term buffer on earnings. Over time, such approaches can create a situation in which the next year’s budget fails to fund even the first year of a company’s strategic plan.
Instead, finance leaders must establish a process for continually revisiting and clarifying the links between budgets and strategy, setting aside dedicated time (monthly, at least, and sometimes more frequently) and going back again and again to the probability-weighted scenarios built into the company’s enterprise valuation model. Especially when conditions are in flux, it’s important to step back and scrutinize how a company’s previously forecasted scenarios are playing out across different geographies and sectors. At that point, it becomes easier to engage key stakeholders in active debate about where resources should go: If performance against budget is going well, the company may elect to double or triple down on initiatives. Conversely, if expectations aren’t met, the company can scale back rapidly, with a plan for reallocating resources and capital toward either product lines, dividends, and share repurchases or company reserves.
Data and details matter—now more than ever
Granularity is essential in a challenging business environment. It’s no less essential to an effective budgeting process. The consequences of not being granular in budgeting are becoming more pronounced, as once-stable levels of revenues and costs become more prone to spikes, inflation fluctuates beyond a narrow band, and supply chains are exposed.
Now more than ever, finance leaders need a finely detailed perspective on the impact of risk on their budgets because not all businesses or products have the same risk factors or levels of exposure. As tariffs, geopolitics, inflation, and other macro trends affect businesses more often (and more severely), finance leaders will need a clear understanding of which variables are most affecting their businesses and why. For example, a temporary supply chain challenge may make it seem as though a company’s top line is tanking when the reality is that supply-side constraints are driving down sales. A granular view of performance metrics can help the business identify and explain anomalies like this.
In general, most of a business’s impact and upside come down to a few important initiatives. For pharmaceutical companies, this may be the introduction of a few critical new medicines. For software-as-a-service companies, for which subscription fees are the backbone of revenue, user growth, customer retention, and the upselling of additional features or premium services will be important drivers.
In every instance, however, companies should gather evidence to understand the base-case trajectory of their businesses and the three to five most important actions and projects that will change and accelerate that trajectory. One useful way to gather that evidence is for CFOs and their teams to decouple price data from volume data and expense dynamics from operating challenges.
Rather than defaulting to broad actions such as “cutting administrative expenses 25 percent in all areas” or asking every business unit to “make do with 10 percent less,” the most effective CFOs welcome some exceptions in their budgets—precisely because they know how their business models work. They regularly conduct detailed breakdowns of the ten or 15 highest-value business units, geographies, or strategic initiatives. And they often implement dynamic forecasting, in which performance data are updated and analyzed in real time. Most are exploring the use of various digital platforms and tools, including generative and agentic AI, to ensure that they’re using the most updated business information to build forecasts and plans, stress-test scenarios, and even generate investor communications about budgets.
Budgeting cadence must match real-time business needs
In previous eras of management, companies didn’t need to move as quickly as they do today. When performance is stable, budgeting can take its time, too, working at a traditional cadence of long-term strategic plans, yearly refreshes, and moderate adaptations, with some scurrying around the time of quarterly investor presentations. Today, traditional budgeting timing is simply too long and slow. Conditions are volatile, and competitive dynamics almost never move in lockstep with quarterly and annual reports.
There are practical ways to avoid being locked into the rigidity of traditional budgeting cycles while still retaining guard rails. As a first step, CFOs and finance teams should take another look at their budgeting cadence against current conditions and determine whether the frequency of budgeting conversations is still appropriate. They should think about whether certain categories of products or projects are on a fast track or a slow track and conduct reviews accordingly.
For example, the finance team in one technology company breaks out its products into two groups for the purposes of budget conversations: a long-cycle group and a high-risk group. Budgets for long-cycle products and projects are reviewed annually, as per traditional processes. But the budgets for high-risk products and projects are reviewed monthly, with decisions about whether to accelerate or stop funding being made in near real time.
Other CFOs and finance teams should similarly think about implementing contingent resourcing—for instance, requiring projects to meet certain sales, revenue, or other targets before more resources kick in and pulling capital from projects that are underperforming or for which managers need to make a more compelling case for proceeding. The CFO at one dental-services organization set aside funding for office renovations and renewed marketing to consumers in the wake of the COVID-19 pandemic. These discretionary dollars were held centrally and allocated based on which regions opened first and each one’s level of customer demand for dental hygiene after quarantine. The organization planned to make this a permanent approach to allocating discretionary funds.
Some companies rely on zero-based-budgeting principles in times of uncertainty to fully rethink which costs are actually needed and where they’re needed to create the most impact. Another solution that we’ve found to be helpful, even if it appears to be radical, is to intentionally make each year’s default resource allocation different from the prior year’s. That is, if a product line were allocated 5 percent of enterprise capital, CFOs should automatically reject that allocation—the way, say, a user prompt would automatically reject an old password. If there are to be exceptions (and of course, there sometimes should be), line managers should argue the case before the investment committee and bear the burden of proof. In the case of a tie, a new allocation amount would be determined. Precisely because conditions are changing, companies can’t wait until it’s too late to change what isn’t working.
Today’s uncertainty makes budgeting more difficult by orders of magnitude. In many organizations, CFOs have just emerged from multiple budgeting cycles in which the resource needs of their businesses quickly fell behind the rapidly changing dynamics in their industries. These changes won’t only continue; now they will come even faster.
To move budgeting from an exercise in reactive scrambling to a means for value creation, CFOs should put fundamentals first: Make budgeting an enabler of strategy, get granular on growth drivers, and amp up the cadence. In support of those actions, they should push for the use of the most appropriate technologies to accelerate decisions, improve the accuracy of forecasts, and improve collaboration across functions. Indeed, CFOs can work with IT leaders to ensure that everyone has access to a single source of truth—a standard, simple, centralized reporting of financials that can be easily linked to core KPIs. In this way, colleagues across functions can work from the same metrics and can obtain them instantly or in near real time.
Without clear, consistent, accessible numbers, it’s impossible to conduct meaningful budgeting. The world isn’t going to get any simpler, and it isn’t going to wait for a budgeting process to keep pace.
