Agile budgeting: why companies need to become increasingly flexible

Corporate culture is changing. Today, companies are faced with strong international competition and have to react. Agile and solid financial planning is required in order to be able to react to the market as flexibly as possible. This article shows how it can be integrated in practice and what positive effects it has.  

A direct comparison of budgeting models: agile vs. traditional  

Every company uses different budgeting models: flexible or agile and traditional. Both have their advantages and disadvantages. Agile budgeting is known above all for its rapid response to market changes. Various financial planning and analysis solution are used for this.

Budgets are reviewed in short cycles (monthly or quarterly) and there is no fixed annual budget. This allows companies to react actively to changes in the market and thus gain a competitive advantage. Another advantage is the centralized decision-making authority. Individual teams in companies have the autonomy to make decisions within defined framework conditions.

Thanks to continuous monitoring of financial data in real time, problems are quickly identified. An essential key to this successful concept is the responsibility of individual teams. They act independently and therefore have a greater awareness of costs and a higher drive for success.

Classic budgeting in contrast

The opposite of agile budgeting is the classic model. Here, a fixed budget plan is drawn up annually. It allows for little to no adjustments. The management structure is also different. Teams have little to no responsibility, but are determined by the upper management level. This offers less scope for independent decisions. 

This method is interesting for large, established companies. Due to their stability in the market, they have experience and can plan the budget better once in advance. The conventional budget model also offers some advantages for other sectors with a low rate of change. These include utilities (such as the energy and water industries) and the public sector. Projects with a long-term focus (such as infrastructure projects) or companies with low market volatility also use the model successfully.

Risks in the absence of agile financial planning

Due to globalization and the increase in online business, some sectors are under enormous pressure. Companies that have always relied on traditional budget models have had to admit defeat to agile market mechanisms.

Examples of this are Nokia and Toys “R” Us. The former mobile phone giant had strong market power for many years. However, with the emergence of new mobile phone manufacturers, it is now under strain. The company suffered huge losses due to its slow adaptation to the smartphone market. One reason for this was the rigid budget planning that still existed from the former market leadership.

Toy company insolvent due to inflexible financial structure

Inflexible financial structures and a failure to adapt to online retailing contributed significantly to the insolvency of Toys ‘R’ Us. This long-established company suffered from a rigid, traditional budgeting strategy that did not allow it to react quickly to changing market conditions. The lack of agile budget planning meant that the company was unable to recognize and implement important market trends in good time.

The former US company worked with a fixed annual budget that was only reviewed and approved once a year. This inflexible planning prevented quick adjustments to market conditions. Competitive companies such as Amazon and Walmart invested early and agilely in their online presences. Toys “R” Us, on the other hand, stuck to traditional business models and reacted too slowly to the digital transformation.

Urgently needed investments in technology and e-commerce were not made in time. As a result, the company was unable to keep pace with the rapid development of online retail. Customers migrated to more flexible and better-positioned competitors. The lack of an online presence led to significant sales losses. 

Agile budget planning would have enabled Toys “R” Us to regularly review and adjust its budgets. Short planning cycles and flexible resource allocation would have enabled the company to react more quickly to market changes. Investments in online retail and digitalization would have been made in good time, which would have significantly increased competitiveness.