Every year, companies invest thousands of hours in building their budgets, only to find within months that the plan no longer matches reality. Demand shifts, input costs change, competitors reposition, and new technologies reset productivity baselines. Yet the budget locks capital into allocations based largely on last year’s choices.
Summing up the problem, a former e-commerce CFO said, “If you stick to a rigid budget, you often find that by the time it’s approved, the world has already moved on, and you’re left trying to catch up.”
The uncomfortable truth is that the traditional annual budget process is not just inefficient; in today’s environment, it is strategically corrosive. In addition to being backward-looking, it reinforces incrementalism and can make dynamic reallocation politically and operationally difficult.
However, a handful of companies are outperforming their peers on growth, resilience, and total shareholder returns, and they’re contributing to their success not by budgeting better, but by budgeting differently. They treat the budget not just as a way to control spending, but as a road map for executing strategy. They have evolved the budgeting process in four ways: they base budgets on strategic choices and value-creation potential, they shift 10 to 20 percent of capital year over year toward higher-return opportunities, they replace single-scenario budgeting with scenario-based planning, and they use AI and machine learning to turn operational data into forward-looking insights.
Providing further evidence of how fundamentally companies are rethinking budgeting, a small number have gone even further by eliminating traditional budgets altogether in favor of approaches built around targets, real-time reporting, automated forecasting, and more dynamic performance management. While still the exception, these approaches underscore the extent to which the role of budgeting is being reconsidered.
This article explores traditional budget building and why a new approach is needed. It then explores the four primary ways top companies are reinventing the process and suggests action steps for CFOs with the courage to redesign the system.
The four imperatives of the new budgeting process
Historically, the annual budget served a critical purpose. In high-growth environments, it created structure, alignment, and basic financial discipline. As the e-commerce CFO recalled about working with earlier-stage companies, the “extremely important” yearly process “was long and cumbersome, like two to three months.”
For scaling organizations, this kind of budgeting provides necessary discipline. The former CFO of a technology services firm recalled that during a period of rapid growth, the company needed to build more structure into its operations and financial management.
“When I first started, we were very immature from an infrastructure perspective. We were growing at 50 or 60 percent a year. As the business got larger and more complicated, we needed to put more structure in place,” she said. The annual budgeting process was part of that structure, helping impose financial discipline as the company scaled.
However, structure is not strategy. Once basic financial discipline is in place, the role of the budget can evolve in the following four ways.
Start with strategy, not last year’s budget
The ability to link strategy to the budget is one of the top differentiators of long-term economic success. In our experience, leading CFOs don’t begin with last year’s spending levels. They start by asking where the company expects to grow, where it needs to improve margins, and where it must strengthen resilience. They then allocate capital to those priorities, rather than simply adjusting historical budgets. Translating strategy into strategic building blocks, with clear estimates of investment and expected returns, enables companies to prioritize strategic investments more effectively and track performance against their original expectations.
In this model, investment is not automatic. Business units must make the case for additional funding based on expected returns, not past entitlements. Companies can then compare and rank incremental strategic investments across the enterprise—considering not only ROI but also strategic importance, urgency, and risk—to decide where to allocate capital.
Reallocate continuously, not annually
Despite widespread recognition that volatility is the new normal, many companies continue to operate as though a single annual plan can anchor performance for 12 months. However, some leading CFOs are institutionalizing rolling forecasts and dynamic reallocation. A former telecom CFO said, “I’m a huge fan of rolling forecasts. All corporations probably have eight to ten assumptions that influence most of the outcome.”
Indeed, most performance variances can be explained by a relatively small set of drivers. Yet too many budgeting processes focus on granular line-item negotiations rather than on the core economic variables that actually determine value creation.
Importantly, sophisticated organizations distinguish between a rolling forecast and a rolling budget. “It’s a rolling forecast, not a rolling budget. Your budget is still a one-year budget, and then the forecast becomes rolling,” the former retail CFO said.
The purpose of the rolling forecast is not to rewrite the budget every quarter, but to detect when conditions change and when they should trigger a response. For example, if demand slows, costs can adjust. If growth picks up, investment may need to increase. The highest-performing companies act on these signals and regularly shift a meaningful share of resources—often 10 to 20 percent year over year and increasingly in-year—toward areas with stronger returns. The rolling forecast horizon also encourages organizations to start thinking about next year’s resourcing rather than focusing solely on the rest of the current year.
The retail CFO emphasized the importance of a flexible budget that allows for agile capital allocation, saying, “You would have had a fair amount of leeway between line items. If revenues start to slow, then you had better be taking action on the cost base, otherwise you don’t deliver your numbers.”
Organizations can act on signals from the rolling forecast in two ways: by regularly reviewing projects to pause or stop underperforming initiatives and reallocate resources to higher-return opportunities; and by setting aside a small strategic reserve to fund new opportunities as they arise.
Plan for multiple scenarios, not a single forecast
Macroeconomic volatility, geopolitical fragmentation, supply chain instability, and technology disruption have rendered the single-scenario budget increasingly fragile. Leading finance organizations no longer treat the budget as a fixed commitment but rather as a plan designed to work under multiple possible outcomes.
This multiscenario approach begins at the design stage, where strategic risk analysis is embedded into planning cycles. “In terms of strategic risks—markets, consumers, economic volatility—that’s an embedded part of any strategic planning process,” noted the retail CFO. Rather than assuming a single base case, risks are explicitly identified and incorporated into the plan.
That risk awareness does not end once the budget is approved. Rolling scenario reviews have become standard practice for high-performing budget teams. Organizations regularly revisit key assumptions and track emerging risks and opportunities. “You would typically have a contingency in there. You’d have governance around how big that contingency could be. And then in the forecast, you’re tracking some of the risks and opportunities,” said the retail CFO. Contingency pools are explicitly governed, allowing capital to be released or withheld as conditions evolve.
Flexibility also extends to innovation funding. Rather than committing large sums up front, some organizations fund new investments as a venture capital (VC) fund might. Describing how this worked at her firm, the IT services CFO said, “We actually took people out of their existing roles, created a funding mechanism for new ideas, and ran it just like you would a VC fund. We had gates and milestones, and we shut things down.”
The COVID-19 pandemic taught many executives a hard lesson about the importance of flexibility. The e-commerce CFO recounted, “In March 2020, venture capital–backed fashion firms I knew cut 40 percent of the employees. The same people told me three months later: ‘Hey, we were wrong.’” These companies overcompensated for the disruptive environment, thinking it was the new normal, he said. Then they were caught flat-footed when the market rebounded.
“In today’s discussions, it’s way more about resilience because many companies learned the hard way how high opportunity costs can be,” he observed.
Harness AI and data to make budgeting forward-looking, not retrospective
Perhaps the most profound shift in budgeting is the move from retrospective, spreadsheet-driven processes to forward-looking, model-based decision-making. Rather than tracking ever more details, leading companies are focusing on the few variables that actually determine financial performance. AI is accelerating this shift, enabling faster, more accurate forecasts and allowing finance teams to model outcomes dynamically as conditions change.
“It is much less of a just pure spreadsheet exercise. . . . You really can operationalize what’s happening,” said the technology services finance chief.
The telecom CFO expanded on the shift, saying, “All corporations can have an eight-to-ten variable model that models everything you need for a budget. This includes market growth, share, subscribers, average revenue per user, variable costs, fixed costs, and capital expenditures.”
By building the budget around a small number of core assumptions, such as how fast the market is growing or what share the company expects to capture, leadership teams can then test and debate underlying assumptions. If the assumptions change, the numbers change with them.
The increasing availability of granular operational data further strengthens this approach. A former industrial CFO noted: “If you have access to your data, there is good linkage between what’s really happening in the business and being able to make predictions.”
AI and machine learning can augment revenue forecasting and granular scenario analysis, making it more sophisticated and informative. The retail CFO added, “Machine learning and AI are particularly helpful when part of the job of the budget is to make a much more granular plan.” The result is a finance function increasingly focused on forward-looking insight.
This evolution has implications for talent and required skill sets. “The expertise needed in today’s world is quite different from what it used to be. The upskilling of talent has definitely become more complex,” observed the retail CFO. Finance functions may require new roles, including AI product managers, data engineers, and ontologists (specialists who structure and manage data). At the same time, traditional finance teams will need to upskill to interpret the outputs of AI tools and translate them into actionable insights.
The CFO who sees the future as a continuation of the past risks obsolescence. As the e-commerce CFO candidly remarked, “Whenever a CFO says, ‘I’ve seen it all. Now just bring me in’ . . . I give them an immediate rejection because literally the next couple of years will be—in all functions, including finance and general administration—an explorative journey.”
Changing the budgeting process can be hard. Dynamic reallocation of capital may challenge entrenched interests, and gated funding forces executives to make difficult trade-offs. Scenario-based planning can expose strategic fragility and transparency into how KPIs impact the profit-and-loss statement may eliminate comfortable ambiguity. Effective performance management remains a critical enabler of both traditional and modern budgeting processes. It requires executives to cascade accountability throughout the organization and to establish business-review cadences that focus less on explaining performance gaps and more on what actions will be taken to address them.
But the cost of inaction is rising. The static annual budget can act as a brake on strategy, reinforce incrementalism, and lock capital into legacy priorities. These are big risks in a world where capital markets reward agility.
To set a new budgeting approach in motion, CFOs can start with the imperatives outlined in this article: hard-wiring value creation into capital allocation; implementing a system of rolling scenario reviews and explicit contingency governance; and reallocating capital both year over year and in-year. Finally, CFOs can ensure that they and their teams have the AI and machine learning capabilities needed to industrialize driver-based planning. A final step, beyond the scope of this article but essential to consider, is redesigning incentives to reward adaptability, so that business units don’t complacently expect budget entitlements.
In summary, CFOs can reimagine budgets as strategic instruments that continuously reallocate capital towards the highest-value opportunities. Companies that successfully make this shift will be best positioned to convert volatility into advantage.
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