AN ALTERNATIVE VIEW OF BUDGETS

We’ve all been taught that budgets should be prepared every year and reviewed against results every month. I learned this in business school and it has been reinforced at every stop I have made throughout my career. However, the last few years I have come to believe that budgeting as so often practiced does not add value. Budgets and forecasts have become an end in and of themselves-not a means to an end, as they should be.In this hyper-competitive, uncertain world it is unreasonable to believe that anyone can with any accuracy assign a meaningful number to results three, six or twelve months from now. Yet this is what most of us are asked to do. Moreover, the leadership often demands a predetermined result no matter how unrealistic it may be. We all know how dangerously easy it is to make a few small changes in assumptions and dramatically improve a budget’s bottom line. It happens everyday.

Typically, the budgeting process works something like this: Every department submits their budget (this is called “being inclusive” by management) knowing that it will be altered. As a result, a pad is built in and it becomes the leadership’s mission to ferret out the fluff and then ask for more. The leaders want more revenue, higher margin and lower expenses. The people directly responsible protest the unrealistic numbers but generally to no avail. For a short time leadership feels great. They have a beautiful budget that everyone, in their mind, has agreed to. Then the numbers start rolling in and they fall short of expectations. At this juncture, the budget becomes a mechanism to criticize and denigrate on a regular basis. When the subordinate points out their earlier objections the leader often notes that the process was “inclusive” and that they “agreed” to the numbers. In the end everyone is disappointed, morale is damaged and the budget is useless.

If done properly the budgeting process adds value. Best and worst case projections are prepared; variables are adjusted to fully understand their impact; the process is inclusive and instills ownership. It is a time to challenge assumptions and prioritize initiatives. Strategies are developed and implemented. Monthly results are evaluated against the budget and last year. Unforeseen issues are discussed and addressed. Successes and failures are reviewed and analyzed for improvement. Underlying the process is the knowledge that budgeting is as much art as science. Everyone acknowledges and accepts that the numbers are only as good as the assumptions upon which they are built.

Every organization needs a budget. Budgets guide us by highlighting opportunities and warning of potential problems. The process from development to review should consider the uncertainties of the marketplace and the limitations of the people making the assumptions. Viewing a budget as anything more than this fosters disappointment and misplaced effort throughout the organization.