Why Budgeting Fails: One Management System is Not Enough
The authors' theme is to question how and why we currently prepare budgets.
They provide four key problem areas what is wrong with budgeting, review the traditional role of budgeting and then provide guiding principles for an advance budgeting system.
As the authors advise, we live in fast-changing times and in a very competitive business environment. In light of such an environment, we need to be conscious that what may have once been acceptable, may no longer be valid.
In my view, the value of this article was that it was written pre the GFC. If the business environment was challenging then, it is even more so today. For instance, a number of economists and media commentators articulate that we are finally moving on from the GFC. However they seem unable to advise what sort of business environment we might be entering.
If we are entering a different business environment, and I believe we are, then what worked yesterday, MAY not work today. It is important therefore to identify and qualify what worked then and what will work now. After all, not all of yesterday's business methodologies and tools are invalid today. Indeed, such tools as budgets are just as important today, as they were yesterday. Therefore it is probably a good time to re-evaluate how our budgets are prepared and used today.
The problems with the budgets of the past according to the authors were:
(i) traditionally, budgets were inefficient because of the time it took to prepare them;
(ii) budgets become obsolete soon after preparation;
(iii) the budgets didn't motivate the right behaviours; and
(iv) budgets were often prepared without reference to the strategic plans of the business.
Moving on, the authors' review the three traditional purposes of budgeting which were to:
1 coordinate the organisation's financial activities and picture;
2 communicate financial expectations; and
3 Motivate managers to act in the company's interest.
Finally the proposed six guiding principles for an advanced budgeting system are to:
1 align budgeting to strategy;
2 link relevant nonfinancial performance measures to budgeting;
3 reduce details through the use of aggregated budgets;
4 use rolling budgets instead of fixed budgets;
5 use relative targets instead of a fixed budget to reward people; and
6 increase the focus on processes instead of on departmental and organisational unit performance.
To conclude, I believe this article is worth a read because it challenges us to think about how and why we prepare the budgets we need in our organisations. The business world is forever changing and if you continue to prepare budgets as you did yesterday you may find your budget is inadequate for today's needs.
Full Article: Authors Peter Horvath & Rolf Sauter, Published in Balanced Scorecard Report, September / October 2004, Pages 9-11