Now You Wish You Were Beyond Your Budget

This is the third part in our series on budgeting and beyond.

In the first part I wrote about a long journey you were about to embark on in “Don’t Tell Me, You’re Still Doing Budgets?” and I gave you this warning: “…when you think all the moving parts are accounted for, something comes up that makes it all obsolete.” The world always develops differently than your assumptions. However, you still decide to produce a budget every year despite wishing you were already beyond your budget. So, let’s discuss how to make the best of your budget situation.

Good, but we can make it even better if…

Here is a list of how we can be good at budgeting… followed by how we can be even better.

  • It’s good to have a budget because it provides a framework for the activities the company plans to do during the year… It would be even better if we realized we must continuously evaluate what activities are the most profitable for our company.
  • It’s good to have a budget because it gives us a chance to discuss with all department heads how they see the coming year and what wishes they have for hiring, training, resources, etc. ... It would be even better if we view these discussions as fluid and understand they require continuous adjustment to achieve the optimum result. If hiring an extra person makes the company more profitable but exceeds the salary budget, make sure our process is flexible enough to hire the extra person.
  • It’s good to have a budget because we now have a forecast to start the year. …It would be even better if we treated the forecast like a moving target which needs constant updating to be an effective management tool. In fact, that is the power behind the forecast, making adjustments to fit current expectations. While we’re at it why not make them rolling forecasts so we don’t bump into the annual forecasting wall; a mid- year event that occurs when there is only 6 months left of our budget and the new budget isn’t complete.
  • It’s good to have a budget because it gives us a benchmark to explain how our business actually develops. It would be even better if we stop explaining our numbers against how we saw the world 6-9 months ago, but rather explain developments one quarter (or even one month) at a time. Rolling forecasts will make this possible and give us a chance to always catch up with an ever-changing reality.
  • It’s good to have a budget because it gives structure to our bonus program. It would be even better if we realized that, because the world is changing and we will never be spot on or even around our budget, we need a more short-term bonus program as well as a long-term one. The short-term program will measure our ability to deliver quarter over quarter while the long-term program will measure our ability to deliver on our strategy. Just think about the harm it will do to our business when 4 months into the year it already looks impossible for most of our staff to get their bonus. So much for the motivational factor.

I could probably go on and on about this one, but I think you get the point. It’s not that the traditional budget is useless, but there are just so many better ways to achieve the original purpose of the budget. Rolling forecasts provide a quarterly/monthly unbiased update from the business on what we expect to deliver. If we’re not happy with that we can take corrective actions. Our target setting process will allow for negotiation where we agree on what short-term actions are needed to fulfil the long-term strategy. Finally, effective resource allocation will ensure we continuously evaluate all projects on their merits and approve the best ones rather than the ones that made it into the budget the year before.

The first steps are quite simple, but there is normally a long change management journey to get this fully embedded into a business. Even if we don’t get our wish and need to stay in traditional budgeting we should at least be critical towards its limitations. So, here we are about to embark on another year. I recommend we seek inspiration from the Beyond Budgeting Network. They too recommend replacing the annual budget with three separate processes addressing precisely the above, namely: target setting, forecasting and resource allocation. Practice shows that this is a great way to get started on a Beyond Budgeting Journey.

Read Part I

Read Part II


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