Budgeting. We all hate it, so why do we still do it?
By Steve Morlidge, Business Forecasting thought leader, author of "Future Ready: How to Master Business Forecasting" and "The Little Book of Beyond Budgeting"
It is difficult to think of another business process that is as universally detested as annual budgeting.
The list of complaints will be familiar to anyone who has run a budget process or has been subjected to one…and that probably means everyone reading this article.
- It consumes an enormous amount of time and effort…often the time of those that have the least to spare. Indeed, the Hackett Group reckons that up to 10% of management time is spent on the annual budget, which would make it the single most expensive business process.
- It takes so long that by the time it is complete it is out of date and of limited value. A survey by Business Finance magazine found that two-thirds of budgets were out of date between 4 and 6 months into the year…so most companies are flying blind most of the time.
- Budgets are inflexible by design. Once people realise they are out of date it is difficult to change them. This is partly because of the level of detail at which they are produced and mainly because they have become the anchor point for so many management processes – from incentives to performance measures, to decision making rights – all of which are inter related meaning that a change to one aspect will impact many other peoples ‘rights’ and obligations.
- Budgets drive dysfunctional ‘gaming’ behaviour. It is always easier to negotiate a lower target than it is to improve performance so unsurprisingly people devote a lot of effort attempting to manage the budget process. As a result revenue and profit are sub optimised, costs artificially inflated and political behaviour is rewarded.
Budgeting has been around for nearly a century but it is still with us, despite its well-known failings.
My guess is the reason is that most people are not aware that there is an alternative to traditional budgeting. Most of the ones that have been touted over the last few decades – Zero Based Budgeting and ‘Better Budgeting’ – amount to no more than doing the same things in a slightly different way. In my view, they do the wrong things slightly righter.
The best alternative – Beyond Budgeting – has also been around for some time but it has failed to have the impact that it should have because it has not been properly understood, or it has been actively misrepresented.
The name ‘Beyond Budgeting’ is an accurate description of what ‘it’ is but unfortunately in some people’s minds it conjures up a nihilistic vision of chaos. I believe these fears are misplaced. Control (in the non-pejorative sense of the word) is key to Beyond Budgeting – it is simply exercised in a different way, using different tools. The ends are is the same, but the means differ.
This is summed up in the following table:
The Beyond Budgeting ideas have matured over the last decade or so and there are now many examples of companies that have applied these ideas and seen their business performance improve dramatically. As a result, I think it is time to correct false impressions of what BB is, and why it is successful. To help relaunch these ideas I have written a short book based on my experience of working with the concepts since they first burst onto the scene in 1998.
Steve Morlidge will be leading an exclusive one-day Beyond Budgeting workshop in central London on the 4th of May 2017.
Join us there while the places are available.