Read a budgeting textbook and it all seems so easy. So why in practice are there so many problems associated with budgeting? In the real world things aren't what they seem to be in theory.
Take a look at some famous quotes about budgeting:
"The budget is the bane of corporate America. It should never have existed. You're always trying to get the lowest out of people." - Jack Welch, Ex-CEO, General Electric
"Budgets are tools of repression, rather than innovation." - Bob Lutz, former president of Chrysler Corporation
"Tell me how you will measure me, and I will tell you how I will behave." - Dr Eliyahu M Goldratt author of The Goal
"When a measure becomes a target, it ceases to be a good measure." - Prof. Charles Goodhart, CBE, FBA, Norman Sosnow Professor of Banking and Finance at the London School of Economics and Chief Advisor to the Bank of England
In an ideal world organisational budgeting should follow the cycle below:
a) Strategic planning
Poor, misguided, inaccurate or rushed strategic planning can result in the wrong plans being made and the organisation pursuing the wrong path.
b) The link between strategic planning and budgeting
In many organisations there is no link between strategic planning and budgeting. The two activities are disconnected, occur at different time intervals and there is little communication between those responsible for strategy and those responsible for budgeting.
c) Budgeting
Similarly - poor, inaccurate or rushed budgeting can be a problem for organisations and result in issues such as overspending or underinvestment.
d) The link between budgeting and implementation
Many organisations spend considerable time and resource forming their annual budgeting (we will specifically look at this in a later section). However, most organisations claim this budget becomes quickly out of date and do not use the budget after this point.
Additionally, in some organisations the budget is painstakingly formulated by the accounts department but is not shared with the rest of the organisation and in particular those responsible for implementing operational plans. In other cases the budget is misunderstood, poorly communicated or simply ignored.
e) Implementation
Poorly executed implementation, often manifested through poor project management is a common cause of failed strategies.
f) The link between implementation and control
Variance analysis, that is comparing budgeted results to actual results, is an essential part of control. There may be valid or even beneficial reasons for variances but every variance has a consequence and this must be fed into management. Therefore another problem of budgetary systems is where the control systems do not monitor variances from budget.
g) Control
Inadequate or indeed a lack of control can cause a well-executed strategy to go over budget with key consequences for the organisation as a whole.
h) The link between control and strategic planning
Finally, many organisations continue to make the same mistakes and repeat the same problems every cycle, which is why budgeting is often referred to as a game: one which is repetitive and - once employees know the rules - can be manipulated. We will explore this concept further throughout this course.
So next time you are struggling with budgeting in your business think about; What stages of the cycle are easiest in your organisation, what stages of the cycle are the most difficult in your organisation and what could your organisation do to improve these difficulties?
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