The article “Freed from the Budget” in the September 2012 edition of CFO Magazine advocates doing away with the process of preparing an annual budget. The following are excerpts from the articles listing compelling reasons why to do away with the process and what a company should do instead of an annual budget:
10 Reasons for Replacing the Budget
1 Budgeting prevents rapid response to unpredictable events.
2 Budgeting is too detailed and expensive, absorbing around 20% of management time.
3 Budgeting is out of date within a few months. Key assumptions change frequently, causing confusion and rework.
4 Budgeting is out of kilter with the competitive environment.
5 Budgeting is divorced from strategy. Budgets are based on functions and departments rather than strategic themes.
6 Budgeting stifles initiative and innovation.
7 Budgeting protects non-value-adding costs. Cost budgets are usually compiled and agreed on based on prior-year outcomes.
8 Budgeting reinforces command-and-control. Budgets were designed to enable functional leaders to manage the organization from the center.
9 Budgeting demotivates people.
10 Budgeting encourages unethical behavior and increases reputational risk. Aggressive targets and incentives drive people to meet the numbers at almost any cost. Source: Beyond Budgeting Round Table
What Beyond Budgeting Companies Do Instead of Budgeting
1 Continuous Management: Shift to rolling forecasts, thus eliminating the huge work-spike caused by the annual budget exercise while keeping finance focused on the future.
2 Target Setting: Shift management’s focus to medium- term targets (three to five years out) that focus employees on reaching them quickly, rather than negotiating a fixed annual target.
3 Incentives: Convert the current pay-for-negotiatedresults system into a pay-for-performance system measured against peers.
4 Action Planning: Focus management on making the organization more agile to provide faster responses to changing conditions.
5 Resource Allocation: Free up the time wasted in annual budgeting negotiations and putting it into continuous planning to quickly improve the business.
6 Accountability: Make teams more accountable by shifting control to relative key performance indicators, focusing managers on continuously improving costs.
A very interesting perspective. Enjoy the read!