Last week, I asked the question “What is Budgeting?“. This week, we will dive into why Businesses Budget and if the Traditional Corporate Budget accomplishes what it sets out to do.
If you do a quick Google search of the above, you get the following reasons for businesses to budget.
The question business leaders need to ask is, does a budget successfully serve these purposes?
Most organizations have processes for looking at and improving their processes. But these process improvements either don’t affect the budgeting process or don’t check to see if the budgeting process is providing value.
Even with very seasoned CFOs, the finance department is sacred or set apart from regular protocols. They are rarely given meaningful metrics to track their performance, and when questioned about their inefficiencies, they often provide blanket excuses and shift blame to other departments.
Budgets are a great example of this. Budgets are often created and updated without knowing the reasons for doing so. Today, we will look at one area where budgets are supposed to provide value and evaluate whether or not they do.
Business planning is a comprehensive process that outlines the company’s vision, goals, and the strategies to achieve them. A business plan is a roadmap for the company’s future, providing direction and a framework for decision-making. It encompasses all aspects of the business, from marketing and sales to operations and human resources, and it requires regular updates to reflect changes in the market and the company’s goals.
Budgets are the short-term (12 months) portion of the business plan, with the addition of 100s of not 1,000s of hours of input from every department and manager of the organization. The budget then is set for the next 12 months.
Whether because of the excessive person-hours spent on the budgeting process or the unwillingness to make changes, unlike the business plan, which management understands needs to be fluid and easily changeable, budgets are set in stone and used as a critical metric to track if the business is executing their annual plan well.
Budgeting fails at the planning purpose because it is inflexible and costs too much time to create. By the time it is finished, the budget is already 2 to 3 months outdated, and the organization has budget fatigue. Instead of recognizing the failure of budgeting and choosing other paths, organizations and their leaders fall into the sunk-cost fallacy and continue to use it as a metric even though the budget has become irrelevant.
Planning needs to be done on a need-by-need basis. It should be done at the appropriate level and in the proper detail. A budget will never be a crystal ball to tell you whether a goal is achievable. A plan is a flexible way to measure the perceived risks and estimated rewards to see if you should choose a direction.
Additional Resources:
Companies Get Budgets All Wrong by The Wall Street Journal
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