Budgeting is something almost every company does and something almost everyone hates and mistrusts. Personally, I’m not a fan and lean strongly toward the Beyond Budgeting approach, but like nearly everyone I still run an annual budget process to achieve some specific benefits. I use the budget to reinforce the awareness of the current state. How much is needed to do what is typically done and why? I think this serves as a strong foundation for planning and management. I try to stay away from budgeting for growth or decline scenarios, though I do like to categorize resources and costs as those that are fixed within a typical range or those that are proportional to activity levels. I use this effort to increase cross organizational understanding, and to teach junior finance and accounting personnel about the organization by having them assist divisions with budget review/development. I like to push strategic and major initiatives into a strategic planning process where the senior leaders collectively agree on the goals, targets, investments, new resources, and the budgetary and performance impact…a separate effort from basic budgeting. My approach was develop by considering the ugly, bad, and the bit of good.
Ugly:
1. A competitive, top down budget process for resources and performance goals tends to make people into hoarders, hedgers, obstructionists, and basically liars. This sets a bad ethical culture, results in little learning but much frustration, and paves the way for lots of excuses all around.
2. Budgets tend to be inflexible when established in this manner, and often make organizations less flexible and competitive. In part, because no one can admit their lies and fabrications.
3. When truth is being shaded, budgeting must be done by the most senior people. This impedes organizational understanding and wastes valuable time and effort of managers and executives.
4. Unmet budget targets can unleash a blame game of competitive investigations and evidentiary claims that is destructive and unproductive.
Bad:
1. Budgeting for performance is often more about individual performance than organizational performance and profitability.
2. Fixed annual budget normally create a glut of marginally useful to wasteful year end spending as the organization acts to solidify their evidence for the next budget cycle. At best, valuable projects are often done later than they should have been.
3. Sales and Revenue can also be managed and manipulated to meet budget targets which disrupts numerous operations throughout the company and can result in legal violations.
Some Good:
1. Budgeting does remind nonfinancial managers to think in terms of monetary impact. Ideally, this is achieved in a way that builds trust, organizational & strategic understanding, flexibility, and teamwork.
2. Budgeting can help spread the details of organizational goals throughout the organization. Assuming the goals are realistic, reasonable, based on solid assumptions, and will change if these assumptions change- this can be a positive experience for the organizations.
What are your experiences with the role of budgeting to improve and increase profitability? Add a comment!