10 Reasons Why Budgets Cause Problems
Beyond Budget Round Table (BBRT), an independent international research collaborative, recently produced a web article arguing that budgets tend to focus on targets based on incremental changes from the previous period.
"The result is a target that is inwardly comfortable to you, yet appears outwardly difficult to your superior. There is no focus on the maximization of customer or shareholder value."
Dean Meyer, one of the proponents of performance-based budgeting, adds that within project-based and service industries, budgets cannot support sound financial decision making, because they do not accurately reflect the full cost of individual projects and services.
Rather than driving strategy forward, budgets are said to be a barrier to change and innovation. Entrepreneurial managers tend to find themselves under fire for incurring costs on projects that were not included on their budgets.
Here are 10 reasons why, and how, budgets can cause your company problems:
1. Budgets are time consuming and expensive
Despite the advent of powerful computer networks and multi-layered models, budgeting remains protracted and expensive. The average time consumed is between four and five months. It also involves many people and absorbs up to 20 to 30 percent of senior executives' and financial managers' time. Some organizations have attempted to place a cost on the whole planning and budgeting process. Ford Motor Company figured out this amounted to $1.2 billion per annum.
2. Budgets provide poor value to users
The perception of the value provided by the budgeting process varies widely. In one firm it was apparent that the group board thought the budget gave them control, whereas operating managers thought it was completely irrelevant to their needs. One of the primary reasons that financial directors rank budgetary reform as their highest priority is that their staffs spend too little of their time adding value. One conclusion from a 1999 global best practices study was that finance staff spent 79 percent of their time on "lower value-added activities" and only 21 percent of their time analyzing the numbers.
3. Budgets fail to focus on shareholder value
Budgets focus on internally negotiated targets which tend to be incremental changes from the previous period's outcomes. The result is a target that is inwardly comfortable to you, yet appears outwardly difficult to your superior. There is no focus on the maximization of customer or shareholder value.
4. Budgets are too rigid and prevent fast response
The evidence suggests that only 20 percent of firms change their budgets within the fiscal cycle. Another survey result shows that 85 percent of management teams spend less than one hour per month discussing strategy
5. Budgets protect rather than reduce costs
"Use it or lose it" is the manager's mantra. Not spending the budget is a cardinal sin in most organizations. The result is that superiors invariably question why the resource is needed and are understandably reluctant to allow it to pass into the budget for the next period
6. Budgets stifle product and strategy innovation. "Never take risks." It is just not worth it. If it's not in the budget, you might be exposed. Anyhow, if you did take a risk and it worked out well, your superior probably thought of it first! And if it didn't work out, your job might be on the line .
7. Budgets focus on sales targets rather than customer satisfaction
Though everyone wants to satisfy customers, that is not how they are measured and rewarded. So they meet the sales target, persuade customers to buy their products, and convince them that their slow-moving stock really is a great deal!
8. Budgets are divorced from strategy
According to a recent cover article in Fortune magazine, around 70 percent of companies surveyed were poor at executing strategy-a massive indictment of the performance management capabilities of budgets.
9. Budgets reinforce a dependency culture
The way to survive and prosper in a budgeting environment is to do what you're told, meet the budget (but never beat it!).
10. Budgets lead to unethical behavior
Managing the results (also known as cooking the books) is a frequent outcome of budgeting. Many finance managers are well versed in "managing the slack" and feeding it into the results when needed. However, as we have seen, this practice can border on outright fraud