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Rob Bracey remembers the moment five years ago when he realized annual budgets weren't for him. He had just spent three painstaking weeks formulating one for his IT services company, Quartet Inc., and was busy presenting it to a peer group.

"One of the guys looked at it and said, 'What is this garbage?'" Mr. Bracey recalls. "I knew every single element of it, I could defend all of my projections, but if you put all of the projections together, it lost context."

His experience reflects a growing frustration with formal, longer-outlook processes, as companies seek to become more agile and entrepreneurial.

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In general, longer-term prediction, which relies primarily on historical data, has become far less reliable in recent years as businesses grapple with global competition, rapidly changing markets and economic unpredictability.

"When you look at budgets, some components are easier to predict than others," says Ramy Elitzur, associate professor of accounting at the Rotman School of Management at the University of Toronto. Recurring revenue, for example, is much easier to plan for than one-time client projects.

The trouble comes when organizations use annual budgets to control their operations, for instance to plan for staffing, resource allocation and other commitments. Basing compensation on how a manager performs relative to his or her budget, for example, encourages them to game the system. In other cases, the politics around budgeting can cause companies to miss important opportunities.

"The biggest common mistake I see is not bringing everything forward, trying to meet an artificial requirement," says Michael Grundy, CMA, controller at Toronto-based Presto, a division of Metrolinx.

"A lot of people will say, 'I think I can do it for X dollars' when they really need Y, but they don't want to ask for Y because they think it makes them look bad."

Mr. Bracey now takes what he calls a "polarized approach" to budgeting. Recurring revenue, whose prediction is straightforward for Quartet, follows standard budgeting procedure where resources are allocated for a set time period.

New revenue opportunities, however, don't get rolled into the budget. Instead, goals are set, accountability measures are put in place, and resources are allocated on a continuing basis. "Budgets sometimes obfuscate what the real issues are," says Mr. Bracey, "but if you go on a project-by-project, individual accountability approach, it works."

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Quartet's approach to budgeting helps Mr. Bracey understand the general rhythm of his business, but he doesn't expect it to provide definitive answers for every decision.

"Nobody ever does an accurate budget, that's just nonsense," says Burlington, Ont. city councillor Paul Sharman, who has about 40 years of budgeting and forecasting experience in the private sector. "It's a negotiation between the person who's being held accountable, and those who are trying to get a fix on the overall organizational results in the long run."

The process of creating the budget document is often bogged down with formalities that can stifle innovation and creativity, paralyze decision making, and consume disproportionate resources. Many budgets take months to formulate, and are rendered obsolete before the fiscal year even begins. Even worse, the process often pits managers against each other.

Burlington-based management consultant Nick Shepherd, CGA, believes that the process has become obsolete in many circumstances. "Budgeting was developed in a command and control management environment," he says. "You parcel up money, and tell people to execute based on that amount of money. What typically happens is that it becomes a numbers exercise."

The budgeting process also distracts financial people from using their skills to help run the business. "It's an overhead process," he says. "It doesn't add any value. Making stuff and selling stuff adds value."

These concerns are causing many businesses to eschew traditional budgeting models for rolling forecasts. According to a publication by PricewaterhouseCoopers LLP titled Breaking the Cycle: The Case for Eliminating the Budget, these align better with company goals, are more transparent, and encourage more proactive behaviour.

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Adopting the new approach is not easy, though – many organizations have grown dependent on their annual budget for annual reviews, vendor contracts and other functions. "It's a change management issue more than anything," Mr. Grundy says.

Technology may help. Financial management tools are far more adaptable than their predecessors, and forecasting functions have become more intuitive.

"The level of sophistication, the computing power we have today is dramatically better than we ever had," says Mr. Sharman. "We have everything we want to know, and the result is way better methodologies."

But it's important to have balance, cautions Saul Plener, national leader, private company services at PwC and an FCPA.

"You can't overanalyze your numbers," he says. "If you're going to revise your numbers on a monthly or weekly basis, you can end up spending more time on your numbers than your revenues.

"You need to find the right balance ... [and] make sure you're out on the street generating revenues."

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