Hey friend. Here's your Thursday Money Talk.

As the year unfolds, businesses are caught up in the meticulous process of budgeting - a tool that, while useful, has been misconstrued and misapplied over the years. This instrument, often met with misgivings, has traditionally been used to both predict and control the future. Yet, this well-intended strategy often spurs counterproductive behaviors.

A case in point is my experience as CFO of a billion-dollar company undergoing a turnaround, where the broken budgeting process was hindering informed decision-making, cash flow management, and the integration of strategy and finance to adjust in real time and forecast accurately.

In the traditional bottom-up budgeting, management determines sales, expected costs, and crucially, profit, while senior leaders create a top-down budget with lofty sales and profit expectations. This process culminates in a tug-of-war between both budgets, settling on a compromise that ties compensation to performance. This often results in inflated figures, short-term tactics to meet targets, and unproductive meetings focused on analyzing variances between actual performance and budget, rather than driving improved performance.

As CFO, I was left in the dark regarding the company's true position in the foreseeable future. It quickly became apparent that we needed to replace the outdated, ineffective budgeting process with a more adaptive forecasting method.

Unlike budgeting, which attempts to predict and control the future, forecasting is designed to inform decision-making and drive relative performance improvement. This method offers a rolling, constantly updated perspective, providing clear visibility 24 months ahead rather than adhering to an annual budgeting timeline.