Managing Your Business is a Year-Round Activity; Shouldn’t Your Budget Be as Well?

by FEI Daily Staff

"Almost all companies prepare a budget, or annual operating plan. And almost all companies do it wrong." - Kenneth A. Merchant, Wall Street Journal


A simple review of the literature concerning corporate budgeting reveals a startling fact: A remarkable number of corporations have no respect for it. There’s even an institute -- Beyond Budgeting Institute -- dedicated to ridding the world of budgets, and replacing them with “a holistic management model that fits the agile mindset.”

Why the loathing? It isn’t a new dislike. In a seminal research project, researchers Péter Horváth and Ralf Sauter published “Why Budgeting Fails: One Management System isn’t Enough,” a survey of attitudes toward the budgeting process among business leaders is revealing. They discovered that the budget process is too long and consumes too many management resources, rapidly becomes obsolete, and fosters bureaucratic dysfunctional behavior instead of entrepreneurship.

Is it any surprise that Jack Welch once called the budgeting process “an annual exercise rarely justified in today’s fast-changing, highly competitive environment”?

Budgeting Then and Now

For executives coming up in the ranks, it may come as bit of a surprise that corporate budgets are a new phenomenon, but they  are in fact relatively new. Corporate budgets were first adopted by mass-manufacturers seeking to manage companies by the numbers. That concept soon spread to other industries.

Writing in the Harvard Business Review, researchers Péter Horváth and Ralf Sauter note that when first developed, the corporate budget had three main purposes:

  1. Coordinate the organization’s financial activities and picture
  2. Communicate financial expectations
  3. Motivate managers to act in the company’s best interest
Worthy goals, of course, but as Simon Caulkin writes in The Financial Times: “what made sense in a stable sellers’ market, when compliance with the schedule was paramount, has become a liability when the priority is creative response to rapid change.

This is precisely the issue that company managers continue to bump up against. Traditional budgeting -- essentially creating a budget once a year in a spreadsheet -- just isn’t suited to the realities of today’s dynamic marketplace.

Innovation in the economy has accelerated the pace of business. Organizations and managers now work in worlds that are increasingly volatile, uncertain, complex, and ambiguous. In such an environment, executives are constantly considering strategic decisions and need accurate budget models to help make data-driven decisions. Rather than simply coordinating financial activities and providing investors with a set of numbers the company hopes to meet, a budget should provide a comprehensive and measurable financial plan for achieving an organization’s financial and operational goals, as well as motivate the right behaviors among all managers.

This is precisely why budgets can no longer be static spreadsheets that sit on a shelf until the next budgeting cycle. A budget must be a living, evolving document managers use as real-time planning tools on a continuous basis. It must be the first place managers look to test what-if scenarios and assess the impact of budget decisions on the company’s P&L, balance sheets and cash flow statements, and that, in turn, means the budget should be easy and quick to update, or else it won’t be used at all, and simply becomes moot.

Business is now a 24/7 enterprise. The way we manage their financials should be as well. If using the word “budget” conjurers up images of static spreadsheets, then let’s call them a phrase that more aptly describes what they need to be: smart budgets - a monthly analysis of how your company is performing.

Chris Howard is vice president of customer experience at Centage.