What happens when good budgets go bad?

Those are exactly the kinds of reasons that you should consider periodic reviews of the budget, to avoid having a budget for much of the year that no one believes in. Consider either quarterly or semiannually, depending on the volatility of circumstances affecting the budget. If necessary you might consider developing a process for addressing individual line items when the need arises to avoid overall scheduled reviews, or at least make them less frequent. Reviews are time consuming and should not be scheduled without good business reasons, so when you have them, explore how to avoid repeating the “bad assumptions” problem and how to better anticipate external factors.

It depends on what you are using the targets for. If you are using it to pay bonuses, I don't think you want to change unless your bonus plan allows for it. In terms of cash needs and managing the business, board communications, or lender/investor discussions, if you have a much different view of the future than your budget, you probably need to re-forecast, create a bridge, communicate and get sign off on tracking to the new numbers. This should only be done after some serious discussions with the executive team. Credibility is gong to be an issue. You want to make sure it is really a "bad budget" versus performance. And, it should be a process that is not just about negative impacts, but rather unexpected upsides could result in a similar discussion.

Simply put, a budget is an estimate at a specific time...it should not be altered once approved. At relevant intervals (monthly/quarterly/annually) compare the budget to actual and provide notes discussing material line items (variances/changes/other items relevant to the numbers and the business). Budgets do go "bad" and proper analysis compared to actual should provide exceptional information for future planning...

Agree with all posters on this. Budget always stays same, most compensation plans and capital budget is build around that. But forecasts should be put in place and reported on too, with related variances based on present view. And related spending assumptions should quickly be reforecasted when top line revenue is missed, or exceeded.

Budgets should be dynamic. They are meant to be a measurement of the results of expected outcomes of strategic and tactical plans. As such, whether you call it a budget or forecast, it needs to change as circumstances change. This isn't to say it shouldn't be used as a measurement of performance, but to hold fast to a flawed plan, or budget, is just plain dumb. One of the things I always say is: Fixed budgets encourage bad spending because "Its in my budget." and discourage good spending because "It isn't in your budget."

Annual fixed budgets are great for mature, slower growth (<15%/year) companies. Annual fixed budgets are not great for hyper growth or turn-around businesses. Also, budgets seem to be more focused on the dollars, and less so on execution outcomes.

Take product development as an example: if the product being developed is dependent upon hiring certain people by certain times in order to have the product ready for sale; then the "budget" or measurement should be based upon hire dates, not monies spent. If the measurement is based upon payroll dollars spent, the "budget" will show a positive spending variance, yet in actuality, this is a big problem because the product development time is being delayed, thus revenues are being pushed out.

On the other hand, maybe revenues are running 500% ahead of plan, holding to a fixed budget would also be silly, as you will need to increase spending to support such a positive situation.

So for me, budgets need to be dynamic and not fixed.

I agree with reviewing quarterly or an agreed upon time frame and altering if drastic changes have taken place. We use our budget to help project future information and if I can't rely on it because something drastically changed from when it was built it serves me no purpose. It sounds like from the reply's that it depends on the business and what the organization uses it for.

I prefer using budgets annually then quarterly forecasts and see how close it comes to the original budget.

Many people use forecasts and budgets synonymously but it is slightly different.

It's best to use Common sense and reason when using budgets.
TOO many times have I seen and worked with people who are Control freaks [Anal] and use Budgets as "the Bible", if you will, and that it can Not be changed! It's no wonder that others do Not like working with those types of people!

Just monitor the amounts on a timely basis (weekly, monthly, quarterly) and adjust it accordingly. Things DO come up unexpectedly!

I've seen budgets so exaggerated "without" considering any possible changes.
Then a month or two later, things changed! The Control freaks then blow up because the budget did Not "go their way"!

Seriously, a budget is an Estimate of things!

Anyone that says that Budgets are 100% Perfect are just kidding themselves!