Budgets are Dead, Long live Budgets

According to Beyond Budgeting (2003, Harvard Business School Press)

'the "fixed-performance contract" mode of conventional budgeting increases costs and delays and centralizes decision-making to the point of reduced flexibility and adaptability. In the current rapidly changing business environment (particularly international business), where there's less of a demand for strictly hierarchical models of management, decentralized budgeting and devolved authority are quite simply survival issues for businesses.'

There is a significant amount of evidence which says that the time spent on budgeting could be as much as 20-30 percent of each managers time but we believe that most of this is time is spent on discussion between the service areas of the organisation and their internal customers and that much of this discussion should take place anyway even if it isn't part of the budgeting process because sevice levels must reflect the needs of the ultimate customers and the business strategy.

The Beyond Budgeting Gurus suggest that budgets are not aligned with strategy -- they state that 'budgets focus on functions and departments, strategy focuses on customer needs.' 

Surely this is an organisational issue not a budgeting mechanism and an effective budget should reflect the goals of the true customer facings departments.

The Chartered Institute of Management Accountants (CIMA)'s Official Terminology of Management Accounting defines a budget as: 'a quantitative statement for a defined period of time, which may include planned revenues, assets, liabilities and cash flows. A budget provides a focus for the organisation, aids the co-ordination of activities and facilitates control.'

So how does this differ from what the "Beyond Budgeting" experts suggest?

At their most radical they suggest that - the only way the inherent contradictions of the budgeting process can be resolved is by scrapping it altogether.

According to both CIMA and the Institute of Chartered Accountants in England and Wales (ICAEW):

'The increasing use of forecasting, in particular, has meant that budgets have become more forward-looking and better linked to strategic planning. In fact, the rolling forecast emerged as one tool in widespread use that almost all the participants - but especially those in companies that operate in fast-changing environments - regarded as useful.'

They suggest that the overall framework of control provided by budgets and rolling forecasts is indispensable. Our experience is that guidance is essential to ensure that all parts of the organisation are working towards the strategic objectives. Ongoing co-ordination and cooperation between different parts of the organisation are invaluable. Budgeting, planning or forecasting are known and reliable ways of achieving this co-ordination if they don't become too bureaucratic and too time consuming. 

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