Time to Rethink Annual Budgets

Starting a new year with new targets and projections can be both exciting and daunting at the same time. Whereas it is crucial for healthcare organizations to have a direction for the coming year, it is also critical to do this in a way that uncertainties and surprises are minimized as much as possible.

The recent pandemic has handed down a much needed reality check to the exercise of plotting numbers based on previous years' trajectory, and handing them over to the stakeholders and teams. Yet, there are very few people who are talking about the shortcomings of this practice in the healthcare industry.

Over the years, I have often wondered and spoken about the futility of creating 'cast in stone' projections based solely on previous performances. Experts who do this while disregarding the market and the business environment are taking their hospitals and organizations for a possible bumpy ride.

My question to the pundits is this - In today's dynamic and fast changing world, isn't 12 months of projections too long a shot? In January of 2023, who can predict with some certainty, what will be influencing our business in December this year?

The answer may lie in Rolling Budgets. It may be more prudent to go with a theory that says organizations can have constant running projections for the next 4 or 5 quarters. At the end of each quarter, the 4th or 5th quarter projections can be added. This also provides an opportunity to change the numbers for the upcoming quarters that have been budgeted, should there be a change in market conditions. This offers a much needed flexibility than having a fixed target for each month, and that too for 12 consecutive months.

Talking of flexibility, I feel the time has come for companies to have Budget A, B and even C in case they want to persist with the 12 month projections formula. As the scenario changes, the revenues and cost composition for the company should change too. May be by June this year, some of us will realize that 10% growth over the last year is not going to happen, as the key assumptions are no longer relevant. It should then be ok to switch to scenario B or C and keep the team motivated towards a more realistic goal. All this takes is to revisit the key assumptions [something we tend to forget once the budget is finalized] every couple of months and see if they still hold ground.

Another pitfall for the fixed 12 month budget cycle is that the last couple of months are usually played in a conservative manner each year. No new investments are done and no new risks are taken in order protect the EBITDA. Even if there is a possible upside, the teams defer the investment to the new budget cycle, thus delaying and possibly killing growth.

I have seen healthcare P&L owners who do not want to grow more than the projected number. They feel if they overperform, the next year will have a higher basis for calculating the growth trajectory. Talk about perils of growing based on the previous year's numbers.

Lastly, talking about governance, I feel that the board and promoters need to give a longer run to the P&L owners in the business units. With a sword dangling on the head of a CEO each quarter, it is almost impossible for them to go for a long term sustainable growth.

All in all, the entire concept of budgeting needs a fresh look both from the Boards and the CXOs. The current process is redundant. It is getting further compromised as the world continues to grapple with rapid changes and uncertainties.

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The author has been part of several healthcare business growth journeys for a period of 20+ years.

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