If you feel like you’ve been hearing the term agile budgeting or agile finance more frequently, you probably have. While agile management was originally created as a framework specifically for budgeting IT projects, it’s a method for budgeting and other financial processes increasingly being used by companies of all sizes.
Agile finance provides flexibility as it allows companies to adjust their planning and projections to new data and information. “We look at it as a forecasting process that’s tailored to handle changes and uncertainty,” says Justin D’Onofrio, budgeting and planning practice lead for Platform Specialists, which builds financial forecasting and budgeting technologies for companies.
Here’s a simple example: Say a company plans to launch two new products in the coming year…a month into the development, it becomes clear that Product A will be more expensive to build than originally planned, while Product B will be streamlined and less expensive. With an agile budget process, the company would alter its budget accordingly and shift resources from Product B to Product A.
How agile is different
Bryan Lapidus, director, financial planning and analysis practice with the Association for Financial Professionals suggests that, in contrast, a traditional budgeting process tends to concentrate the decision-making upfront, in what’s often called a waterfall process. . That means a business might spend months building a budget, securing approval from stakeholders, and then living with that plan for the next 12 months.
The shortcoming? “You can never know 100% of what will happen before the year starts,” Lapidus says. Moreover, organizations often invest a great deal of time in their budgeting processes, only to find they’re hit by a curveball, like a new competitor, economic turbulence, or changing customer sentiment, that they didn’t expect.
This isn’t to suggest that an agile approach means doing away with budgets or plans entirely. Indeed, the traditional process is good at creating a long-term vision that can provide a broad understanding of the company’s direction, Lapidus notes. However, rather than try to adhere to a budget whose assumptions may be out of date by the time it’s used to measure operations, an agile plan allows for course corrections by soliciting and using new information.
With marketing projects, for instance, the finance team tries to match the budget to each project as best it can, and then re-forecasts as each sprint is completed and reviewed, Lapidusexplains. (A sprint is a set time period, usually between one week and one month, during which specific work is completed and made ready for review.)
When agile planning is used across an organization, projects are broken into component parts. Finance identifies the points at which executives will decide whether to continue as is, or to shift the allocation of resources.
Keys to success
According to Lapidus, an agile approach requires the willingness to frequently reforecast and update projects, and to redeploy people and capital. That can mean a cultural change. For example, if project evidence shows a project is unlikely to meet the criteria – whether it’s the company’s established return on investment or the required sales volume – and future funding is reduced, it can feel like a failure. Employees need to understand the decision reflects the newest information and isn’t an indictment of their work.
Before implementing an agile planning approach, businesses should develop a system – whether using spreadsheets or automated financial forecasting tool – that can accept new information and quickly generate new financial projections that reflect the changing business environment, D’Onofrio advises.
Before resources are allocated to a project, a company should establish criteria by which that project will be evaluated. It may be simply the revenue generated, but it could also be something like the number of products sold or customers generated. Without concrete criteria, it will be harder to justify changes made to resource allocations and to tie those decisions to a project’s performance.
Given the high speed of change in today’s world, it’s imperative that businesses use forecasting and budgeting processes that can be adapted to new information and conditions. An agile approach to financial management gives organizations a way to assess how their initiatives are performing and make changes that improve the odds they’ll succeed.
