You’re about to embark on a long journey that will take months of hard work, long hours, heated discussions while some alliances will be broken and new ones will be formed. At the end of it all when you have your goal in sight you suddenly see a storm coming out of nowhere which moves the goal in a completely different direction. What do you do now? Continue towards the original goal or change your course to follow the moving target?
Doing budgets is like a long walk to the Promised Land
Above sounds like quite the adventure but, in fact, it’s merely the description of your budget process. It takes months to complete, you face off in tough discussions with business leaders about a few dollars here and there and at the end of it all when you present your shiny numbers to
“Thank you for the presentation BUT that’s not exactly the number we had in mind…”
So you go back and re-do the budget to make it fit what management wants even though you know it will never materialize. In any case the number is done and signed off when suddenly oil price drops 30%, USD appreciates with 15% and all raw material prices drops because China is growing much slower than anticipated. Granted there are winners and losers in every scenario except your budget which loses out every time. Whether it means you will never reach the budget or will grossly over perform doesn’t really matter as the purpose of your budget (being a target, a realistic forecast and a resource allocation) is flawed no matter how you twist and turn it.
Just go Beyond Budgeting
I already warned you that this would happen back in January in “3 Reasons Your Budget Is Already Outdated” but since you are reading this you probably chose to ignore my advice. Well, here we are 8 months later and you are about to go down the same flawed path for 2016. Before you do it though please consider asking yourself some of these essential questions.
- How do I set a target that’s aligned with my long-term strategy yet still fulfils some short term goals?
- How do I ensure frequently having an updated unbiased forecast for future periods?
- How will you succeed with allocating funds to the projects that have the highest impact on the bottom-line?
- How should you do performance management throughout the year to keep people focused on delivering the best possible outcomes for the company?
The answer needs to be found Beyond Budgeting which is not just a process change but more importantly a cultural change. You can change the process but if the company culture and mindset stays the same you’re really just doing some mindless re-branding. Don’t expect results to be any different than with the good old budget process.
The silliest budget assumption
The worst thing you can do and this happens in most budget processes is to assume everything will stay the same next year. The chance of that happening is slim to none. Your fancy 5-year strategy with all its assumptions will never turn out exactly the way you imagined it. Whether it’s the world economy, industry behaviour or poor internal performance that surprises you, you can be sure that some things will change. You need a process that’s much more dynamic and can adapt to the shifts in the world around you. Otherwise, you will be caught standing on two feet every time the storm hits you and in the end your company will cease to exist. So expect change, expect that you’re not able to predict a whole lot and accept that it’s time for a change and that your budget process is no longer useful.
Are you really still doing budgets or are you fortunate enough to have gotten rid of them? If you’re a diehard budget fan I would love to hear your views on why the budget is still the best?