Budgeting is the mantle on which a company stands. It is a control instrument and an instrument to measure a company´s success against. Sadly, an average company spends at the very least 4 months and expending 20-30% of senior executives´ and financial managers´ time. Believe it or not, other companies take up to 9 months to do budgeting.
With the tying of employee and executive compensation directly to performance against the budget, traditional budgeting has turned into internal politicking and pure gamesmanship. It promotes a culture of mistrust, manipulation, and deceit. This is not budgeting´s intent.
Traditional budgeting has prevented fast and flexible adaptation to the changing market.
So what exactly are the problems with traditional budgeting?
- Twisted goals
If you tie executive and employee incentives directly to performance against the budget you pretty much are authorizing the executives and employees to minimize performance expectation. In many companies where this is done, employees ask for an overly achievable budget so that it becomes effortless to hit the goal.
Depending on what type of center executives or managers manage, they can either maximize spending regardless of the necessity of spending or lowball the budget in order to barely exceed it to make them look good from an incentive standpoint. This technique is not only is counterproductive towards the company´s growth, it becomes a game of tactics in order to bag incentives regardless of its repercussions on the business.
- Resource intensive
Traditional budgeting not only costs too much, it takes too long to accomplish and demands help from too many people. As mentioned above, majority of companies take anywhere between 4 months to 9 months to complete this process. So if a fiscal year begins in January, it doesn’t get completed until April or May at the earliest.
To add to that, traditional budgeting requires a lot of back and forth negotiation which ends up in the counterproductive setting of politicking internally where managers and employees seek to achieve what is best for them, not necessarily for the company.
- Traditional budgets are inflexible
Traditional budgets customarily is a top down process that becomes a detailed bottom up later on to meet fixed goals as set by the senior management whether it be realistically attainable or not. The biggest problem is that once the budget is finalized, there is little to no room for changes.
In the course of a year, several things can happen – regulations can change, economy can quickly change thereafter, market conditions change, and competition may become stiffer due to emerging competitors or due to mergers or newly formed alliances and partnerships which will have serious consequences financially but with traditional budgeting, none of these factors are taken into consideration. The things considered are only those that were known at the time of the budget creation.
To even add to that, it is a known fact that many finance managers and executives admit that the assumptions used are so different from the actual results making the budget totally irrelevant and useless.
Then we are brought to a more important question of – What then must be done if not for traditional budgeting?
The rolling forecast is the remedy to this illness. This is a solid first step towards a dynamic and responsive performance management. A rolling forecast is a projection into the future that is based on past performance that is constantly updated to allow input and real time information reflecting the changing conditions.
Rolling forecast is the best current prediction of the company´s financial and operational performance at a given period. This period can be 6, 12, 18, or 24 months. It is called rolling forecast because it rolls as time passes by.
When budgeting, you don’t want to do too far in advance because it then becomes too uncertain and unpredictable at the same time it shouldn’t be too short so you can still see the impact of your decisions.
Since rolling forecasts are updated more regularly, they are more accurate and they are not as tedious to update as a traditional budget. One of the good things about a rolling forecast as well is that it solves the issue on tying incentives to performance against the budget since it is now focused on outperforming competitors.
While there are clearer advantages of rolling forecasts in comparison to traditional budget, moving fully towards this direction is still something many companies are not prepared to do. It has to start with willingness from C-level which has to have the necessary buy-in of everyone under.
Running a business today with an inefficient and less adaptive budget will take the fun, energy, and time out of the company. It will be onerous and it will not be sustainable and competitive.
DSPanel offers cutting edge technology platform for business analytics, planning, and visualization. DSPanel designs, builds, and operates with the end users in mind. Performance Canvas was created by DSPanel to answer the unarticulated needs of the market not addressed by previous available solutions. With Performance Canvas, information is transformed into valuable business insights for the business executives to utilize in their decision-making process. DSPanel currently has over 2500 organizations deploying their solutions.