Managing Budgets

Hope, J. and Fraser, R. 2003, Who Needs Budgets? Traditional management control system is highly criticized. Organizations are transforming from centralized hierarchies into devolved networks that allow for quick adjustments to market conditions. However traditional budgeting does not respond to the market condition. Budget is static and inflexible. Budget is the main benchmark for the management control system. Highlight the spending's, achievement of the budget. But PE should be based on the industry norms, peer company performance and global benchmark.

Continue ………. In extreme cases, use of the budget to force performance improvements may lead to a breakdown in corporate ethics. Example: Worldcome, Enron –white collar crimes Budget have been rejected being reliance on obsolete data. What the data indicate about the future. Budget is short term focus and which is a barrier for improving the competitive position. Need shift from annual 12 months budget to trend analysis and rolling forecast.

Continue Instead of adopting fixed annual targets, business units set longer-term goals based on benchmarks such as return on capital. Other KPIs—such as profits, cash flows, cost ratios, customer satisfaction, and quality. Internal performance measurements External industry norms and peer results

Continue Borealis, a Danish petrochemicals company, have been the reduction of fixed costs by 30% over five years and a decrease in time lost to accidents in its plants. Employees are rewarded their contribution to the annual target. Highly control by the centralized function. No employee empowerment or decentralization to address the concerns of the different market segments.

Continue …. Budgetary planning takes a long time, costs too much, and consumes too many corporate resources.  Average 6-8 months, 20%-30% senior managers time, back and forth negotiation, Internal politics comes first than serving the valuable customers. At the planning stage focus is to departmental sub optimization and not serving to the purpose of Goal Congruence (Beyond Budgeting round table, 2007) Clear in text references is a must

factors with financial repercussions. Continue Budget is fixed and inflexible, and can quickly become irrelevant.  The economy may change, industry or market conditions may change, something specific within the business may change.  Regulations may roil the playing field.  New entrants or competition may emerge.  There may be new concepts, new partnerships, new innovations, or other internal factors with financial repercussions.  A survey of planning, budgeting, and forecasting practices by APQC and the BBRT found that 55% of respondents felt that the assumptions used in their budgets were so different than actual results that the budgets were useless within the first six months of the year. 

Survey results 20% of the firms change their budgets within the Fiscal year. 85% of the management teams spend less than one hour per month discussing strategy