The CFOs face increasing pressure of better budgetary control because budgets today are used for performance planning and evaluation of actual business performance. True enough, budgets can tell us a number of things because of its ability to tie together different parts of the business organization.
Even though this practice has been going on for a long time and several efforts are done to try and improve budgets, it is still faced with a lot of limitations followed by criticisms.
We have listed down the 3 most common criticisms of budgets in practice today.
Reduced value of budgets
Budgets are too time consuming to make and the amount of time needed to prepare these budgets is not profitable for any business. More importantly, a lot of budgets are updated only annually that the assumptions that stem out from these budgets are not anymore up to date. One of the recognized problems of conventional budgets is that it cannot anticipate a lot of uncertainties in a dynamic and fast paced environment. Additionally, if the people involved in the budget process do not have a good standard of forecasting/prediction, the budget they provide cannot really be used as a reasonable performance standard against which they can be held accountable for. In this respect, there is little value to the budget.
Imposition of centralized decision making
Better budgetary control can mean imposing a center-focused command and control. This can oftentimes mean that there is more focus on cost reductions than value creation. This is not to say that cost reduction is a bad thing, just that oftentimes it can hamper the achievement of strategic goals. It has the tendency to constrain the ability to be more agile that instead of promoting change, it can impede change. Further, a budget can exclusively focus on financial performance giving very little focus to other non-financial goals of the organization.
Tendency to make people feel undervalued
Due to the nature of the budget´s ability to impose vertical command and control, budgets can reinforce departmental barriers instead of fighting to remove them. It has the tendency to lose its focus in value creation within the organization which can hinder employees from arriving at the best possible decision. Departments that do not get a budget that they think they deserve can feel undervalued which has dire consequences on their performance. There are several other problems and criticism of budgets and many continue to demand improvement of how budgets are done. Several companies today are aggressively investing in a system that can help them improve the budget cycle time and process such as a system that allows them to do a rolling forecasts among others.
If you are one of those looking to improve how you do your budget cycle today, Performance Canvas offers a complete Corporate Performance Management tool that allows you to have a total reporting and budgeting solution integration. To know more about Performance Canvas, email us at firstname.lastname@example.org or visit www.performancecanvas.com.