Why Budgeting Fails, Part 1

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The Problems with Budgeting:

  1. It’s inefficient. The traditional budgeting process takes too long and consumes too many management resources.
  2. It rapidly becomes obsolete. With their annual focus, most budgets are outdated soon after they’ve been set.
  3. It doesn’t motivate the right behaviors. Traditional budgeting fails to move people to act in their company’s best interest. It encourages bureaucracy and dysfunctional behavior instead of entrepreneurship. Managers can deliberately lowball their financial targets to make their performance appear better.
  4. It’s out of sync with the strategic plan. Perhaps most important, traditional budgeting emphasizes financial performance over and above the pursuit of strategy.

 

The Traditional Role of Budgeting – Designed to Serve Three Main Purposes:

  1. Coordinate the organization’s financial activities and picture. The point of the budget isn’t merely profit planning; it’s designed to align the individual units to the organization’s strategic and operational objectives.
  2. Communicate financial expectations. A budget is designed to give managers a clear understanding of the company’s financial goals, from expected cost savings to targeted revenues.
  3. Motivate managers to act in the company’s interest. Rewarding managers for achieving challenging objectives is probably the most important – yet most debated – function of budgeting. Budgets more often than not encourage dysfunctional behavior such as “padding” or “slacking”.

 

The real problem is that the traditional approach to budgeting is no longer suited to the realities of today’s dynamic business environment. Companies that continue to rely on the budgeting system as their only management system are following a prescription for failure.

 

Business planning is essential for business prosperity. Businesses, like people, don’t plan to fail – they fail to plan.  If you would like to learn more about how you can transform you business using the Bible as your guide, email me at info@commonsensecfo.com.

 

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