Should We Abandon Budgeting or Can We Improve It?

Should We Abandon Budgeting or Can We Improve It?

By Thorsteinn Siglaugsson, Consultant / Corporate trainer / Manager

Beyond Budgeting, Traditional Budgeting, Rolling Forecast

Traditional budgeting has for a long time been criticized for encouraging counterproductive behaviour, hindering growth and wasting time on useless exercises. In recent years, the Beyond Budgeting methodology has gained ground as an alternative. Being a general management philosophy to a large extent Beyond Budgeting plays down or altogether eliminates the annual budget as a management tool, shifting the focus to rolling forecasts and non-budget related KPI's.

In between Beyond Budgeting and the traditional approach we find alternatives that are not as radical as Beyond Budgeting but aim at reforming the traditional approach and minimizing the negative effects. The Better Budgeting and Advanced Budgeting approaches aim to do this, focusing on rolling forecasts, turning towards driver-based planning instead of KPI's based on after-the-fact financial results, and thus better linking performance targets with business drivers.

The traditional planning and budgeting approach certainly has many drawbacks and it is important to keep improving and searching for better alternatives. We just have to keep in mind that companies are different. While a young company operating in a dynamic market may find detailed budgeting beside the point, for an established, hierarchical business in a stable market, implementing a radical change in management may be doomed to fail. Thus, before deciding on your strategy, it makes sense to consider the situation of your business from the perspectives of your external environment on the one hand and your internal structure on the other.

This being said it may be argued that the core problem, in fact, lies with the concept of budgeting itself. The reason is that budgeting tries to accomplish three different tasks at the same time and within the same framework; forecasting, target setting and resource allocation, while in fact, those should be different processes. A good forecast should be realistic and unbiased, but as soon as we start using the forecast as a target we lose those qualities. A good target should be both realistic and ambitious; it should push us to the limits. And in order to allocate resources correctly, we need a good unbiased forecast and we need to be able to change the allocation as we go along.

The key to improvement, therefore, is to go beyond the generic concept of budgeting by breaking it up into its core components - the specific tasks we are trying to achieve. Once this is done we can design our processes around those tasks. The urgency and nature of this exercise should be determined by the specific situation and environment of our business. There is no single size that fits all.

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