In this age of automation, traditional budgeting is becoming obsolete. Traditional budgeting practice gives a wrong sense of security and it indeed sucks the fun, energy, and time out of the front liners and decision makers in the company.
Today, many departments say we succeeded “despite” of our budgets not “because” of our budgets. That statement in itself tells us that budgets are not in touch with the realities of the daily needs and battles of operations.
This is a sentiment shared globally by many decision makers of organizations which is why forward-thinking CFOs have longed lobbied for the complete abandonment of traditional budgeting in favor of rolling forecasts or any other method of continuous planning.
One might wonder why such an ineffective practice still exist even for large corporations with the brightest minds in the industry. Truth be told, it is the culture of budgeting that is the root cause of this all.
Many organizations have this mindset of “we have always done it this way and it has worked so far”.
While that may be the case, it hinders further improvement of the entire budgeting process simply because of the reason – it has worked over the years in one way or another.
Indeed, budgets which were once meant to be meaningful and useful instruments to propel an organization towards success have become enterprise success hindrances. It has prevented many companies´ from providing fast and flexible reaction to market stressors.
Traditional budgeting has promoted a culture of mistrust, powerplay, and lack of transparency within the organization.
Why Abandon Traditional Budgeting?
- Too Much
Too much time, too much resources needed, and too much money.
Traditional budgeting not only demands a ridiculous amount of time to complete with some companies spending 5-10 months each cycle, it also has to be ping-ponged back and forth within the organization for details, input, and negotiation which leads to consumption of too much corporate resources.
In addition, it has been found that multinational companies usually spend 25,000 man days per billion-dollar revenue to put the annual budget together – the amount of money that is required to perform traditional budgeting is too much and too unnecessary.
As mentioned, many companies spend 5-10 months to complete their budgets. Some start their fiscal year in the summer and they end in December. Most of the time, traditional budgets starts from the top down and then becomes a detailed bottom up in order to meet certain set targets.
The biggest problem is that once the budget is completed, it is locked. No changes are to be expected. While this is understandable, this is not very practical because the market conditions can change, regulations can change, competition can change or business direction may change which is why having an inflexible budget does not maximize the company´s potential. It instead hinders the company from being able to timely respond to internal or external factors as they happen.
The assumptions made during the budget process may not anymore be applicable to the current situation which renders the budget not only inflexible but also downright useless.
One of the biggest pitfall of traditional budgeting is that it is oftentimes tied to performance against budget. Due to this, it is not very surprising for employees to try to minimize performance expectations in order to hit their targets.
It then becomes a mind game and a game of negotiation whereby the sweet talkers can negotiate an overly simplified and achievable budget which they want to be measured against in order to produce “good results” in the end.
Instead of a budget helping the management, it turns the management and its front liners against each other in a sort of gamesmanship and deceit.
Best Practices in Budgeting with Performance Canvas
Performance Canvas is one of today´s most preferred budgeting and reporting solution of choice for medium to large sized organizations. It is preferred because this solution incorporates the best practices in budgeting to the solution itself.
For example, instead of traditional budgeting, Performance Canvas lobbies for the use of rolling forecasts as a way to better respond to change.
Rolling forecast is a logical adaptation of a fixed budget whereby it is based partly on past performance that is routinely updated in order to incorporate input and new information reflecting the changes in the current situation.
This is just one of the many examples of the best practices found within this unified CPM solution. To know more about the other best practices in budgeting, see a demo of this solution by emailing firstname.lastname@example.org or by visiting www.performancecanvas.com.
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