Don’t Tell Me, You’re Still Doing Budgets?
This is the first part in our series on budgeting and beyond.
Today you may be in the midst of a long journey that will take months of hard work, long hours, and heated discussions. Alliances will be broken, and new ones will be formed. At the end of it all, when you have your goal in sight, you suddenly see a storm coming out of nowhere which moves the goal in a completely different direction. What do you do now? Continue towards the original goal or change your course to follow the moving target?
Doing budgets is like a long walk to the Promised Land
The above may sound like quite the adventure. In fact, it’s merely a description of the budget process for many companies. It takes months to complete. You face off in tough discussions with business leaders about a few dollars here and there. At the end of it all, just when you think all the moving parts are accounted for, something comes up that makes it all obsolete.
So, you go back and re-do the budget to make it fit the current environment that will almost certainly change before the ink on the new budget is dry. In any case, the number is done and signed off when suddenly oil prices drop 30%, USD appreciates with 15% and all raw material prices drop because China is growing much slower than anticipated. Granted there are winners and losers in every scenario - except your budget, which loses out every time. Whether it means you will never reach the budget or will grossly over perform doesn’t really matter as the purpose of your budget – as a target for compensation, a forecast for planning and a resource allocation tool - is flawed no matter how you twist and turn it.
Just go Beyond Budgeting
Before going through your annual budgeting process please consider asking yourself some of these essential questions:
The answers can be found in the principles of Beyond Budgeting. This is not just a process change but more importantly a cultural change. By changing the company culture and mindset in addition to the process we can create a sustainable means to answer the questions above.
- How do we set targets that align with our long-term strategy yet still fulfil our short-term goals?
- How do we ensure having an updated unbiased forecast for future periods as often as we need it?
- How will we succeed with allocating funds to the projects that have the highest impact on the bottom-line?
- How should we conduct performance management throughout the year to keep people focused on delivering the best possible outcomes for the company?
The silliest budget assumption
It’s common to begin the budget process using the status quo and tweak some variables we can control to improve the business. The chance of the status quo continuing is slim to none. We all know our 5-year strategy with all its assumptions will never turn out exactly the way we imagined it. Whether it’s the world economy, industry behavior or poor internal performance that surprises us, we can be sure things will change. We need a process that is dynamic and can adapt to the shifts in the world around us. Expect change. Expect that we’re not able to predict everything accurately and accept that it’s time for a change. Our budget process is no longer as useful as it should be.
Read the next article in the series: 3 Reasons Your Budget Is Already Outdated
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